Oil Efficiency, Demand, and Prices: a Tale of Ups and Downs

Luca Guerrieri and Martin Bodenstein

No 25, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: The macroeconomic implications of oil price fluctuations vary according to their sources. Our estimated two-country DSGE model distinguishes between country-specific oil supply shocks, various domestic and foreign activity shocks, and oil efficiency shocks. Changes in foreign oil efficiency, modeled as factor-augmenting technology, were the key driver of fluctuations in oil prices between 1984 and 2008, but had modest effects on U.S. activity. A pickup in foreign activity played an important role in the 2003-2008 oil price runup. Beyond quantifying the responses of oil prices and economic activity, our model informs about the propagation mechanisms. We find evidence that nonoil trade linkages are an important transmission channel for shocks that affect oil prices. Conversely, nominal rigidities and monetary policy are not.

Date: 2012
New Economics Papers: this item is included in nep-dge, nep-ene and nep-mac
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Citations: View citations in EconPapers (9)

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Working Paper: Oil efficiency, demand, and prices: a tale of ups and downs (2011)
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