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The Impact of Oil Price Changes in a New Keynesian Model of the U.S. Economy

Francesca Rondina ()

No 1709E, Working Papers from University of Ottawa, Department of Economics

Abstract: This paper studies the impact of a change in real oil prices on output and inflation in a New Keynesian model of the U.S. economy. The main goal of the analysis is to assess whether the cross-equation restrictions imposed by the model play a role in the transmission mechanism of exogenous oil price shocks. I find that the interactions between oil prices, domestic variables, and expectations implied by the New Keynesian framework generate responses that are quite modest, and that can depart from those emerging from a more unrestricted SVAR model. I also find that changes in oil prices that cannot be predicted based on the available information are, for the most part, exogenous to the U.S. economy. As such, augmenting the model to account for their possible endogeneity does not deliver substantially different results.

Keywords: Oil Prices; Endogeneity; New Keynesian Model; Expectations (search for similar items in EconPapers)
JEL-codes: E12 E17 Q43 Q47 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2017
New Economics Papers: this item is included in nep-ene and nep-mac
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