The state-dependent effects of oil supply news shocks

Zixiang Zhu, Yake Wen, Weimin Zhou and Xintong Liu

Energy Economics, 2025, vol. 149, issue C

Abstract: We show that the effects of oil supply news shocks are state-dependent. Using a threshold Structural Vector Autoregression (SVAR) model for the U.S. economy, we identify oil supply news shocks and find that their macroeconomic impact is significantly greater and more pronounced during periods of high inflation or following negative shocks. Our results are robust under the state-dependent local projection method and alternative measures of oil supply news shocks. To explain these empirical findings, we integrate oil into a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model featuring quasi-kinked demand curves in firm pricing. The model captures both the state-dependency between high versus low inflation regimes and the asymmetric responses to positive versus negative shocks. We show that the magnitude of these effects is influenced by the elasticity of substitution between oil and non-oil inputs, as well as the curvature of the demand curve. The model also implies that the monetary policy transmission is state-dependent, suggesting that the central bank faces a more severe trade-off between inflation and output stabilization during periods of high inflation or under negative shocks. Our analysis shows that adopting a more flexible, output-targeting rule can reduce welfare loss in such scenarios.

Keywords: Oil supply news shock; Quasi-kinked demand; State-dependent; Inflation (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:149:y:2025:i:c:s0140988325006085

DOI: 10.1016/j.eneco.2025.108781

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