How do oil shocks transmit through the US economy? Evidence from a large BVAR model with stochastic volatility

Renee Fry-McKibbin and Beili Zhu

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper employs a large BVAR model with common stochastic volatility to examine the effects of oil supply shocks, global oil demand shocks and precautionary oil shocks on 17 U.S. macroeconomic and financial market variables from 1986Q1 to 2019Q2. Generalized impulse response functions calculated using stochastic volatility provide a time-varying account of the impacts of the shocks occurring in each quarter. We also compute standard impulse response functions for shocks of the sizes evident in 2019Q2 and 2008Q4. The magnitudes of the generalized impulse response functions vary over time, but the fluctuations are not particularly different except during the global financial crisis. All oil shocks have permanent inflationary effects; there is evidence of long-run adverse effects on several macroeconomic variables because of global oil demand shocks despite rising GDP, and all oil shocks negatively affect the U.S. stock and currency markets in the long term, but the effects on the bond market differ.

Keywords: Generalised impulse responses; Sign restrictions (search for similar items in EconPapers)
JEL-codes: C32 E31 E32 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2021-01
New Economics Papers: this item is included in nep-ene, nep-mac and nep-ore
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2021-13

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