Time-Varying Oil Price Volatility and Macroeconomic Aggregates

Michael Plante and Nora Traum

No 2012-002, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: We illustrate the theoretical relation among output, consumption, investment, and oil price volatility in a real business cycle model. The model incorporates demand for oil by a firm, as an intermediate input, and by a household, used in conjunction with a durable good. We estimate a stochastic volatility process for the real price of oil over the period 1986-2011 and utilize the estimated process in a non-linear approximation of the model. For realistic calibrations, an increase in oil price volatility produces a temporary decrease in durable spending, while precautionary savings motives lead investment and real GDP to rise. Irreversible capital and durable investment decisions do not overturn this result.

Pages: 39 pages
Date: 2012-02
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Working Paper: Time-varying oil price volatility and macroeconomic aggregates (2012)
Working Paper: Time-Varying Oil Price Volatility and Macroeconomic Aggregates (2012)
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