Accounting for Oil Price Variation and Weakening Impact of the Oil Crisis

Naohisa Hirakata and Nao Sudo

No 09-E-01, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: Recent empirical studies reveal that the oil price-output relationship is weakening in the US. Oil price-output correlation is less negative, and output reduction in response to oil price rise is more moderate after mid 1980s. In contrast to the conventional view that there have been changes in the economic structures that have made output less responsive to oil price shocks, we show that what have changed are the sources of oil price variation. We develop a DSGE model where oil price and US output are endogenously determined by the exogenous movements of US TFP and the oil supply. Having no changes in economic structure, our model yields dynamics of the oil price and output that show a weakening in the oil price-output relationship. There are changes in the way that the exogenous variables evolve. Two changes are important. First, oil supply variation has become moderate in recent years. Second, oil supply shortage is no longer followed by a large decline in TFP. We show that less volatile oil supply variation results in less negative oil price- output correlations, and a smaller TFP decline during oil supply shortfall implies a smaller output decline during oil price increases.

Keywords: Oil Price Accounting; DSGE Model; Total Factor Productivity (TFP) (search for similar items in EconPapers)
JEL-codes: E32 E37 Q41 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.imes.boj.or.jp/research/papers/english/09-E-01.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:09-e-01

Access Statistics for this paper

More papers in IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Kinken ().