Tuesday, October 22, 2013

Time-Varying Effects of Oil Supply Shocks on the US Economy

AEJ Macro: Using time-varying BVARs, we find a substantial decline in the shortrun price elasticity of oil demand since the mid-1980s. This finding helps explain why an oil production shortfall of the same magnitude is associated with a stronger response of oil prices and more severe macroeconomic consequences over time, while a similar oil price increase is associated with smaller output effects. Oil supply shocks also account for a smaller fraction of real oil price variability in more recent periods, in contrast to oil demand shocks. The overall effects of oil supply disruptions on the US economy have, however, been modest.

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