Oil Price Shocks the Macroeconomy: What Has Been Learned Since 1996

Jones, Donald W.; Leiby, Paul N.; Paik, Inja K.
April 2004
Energy Journal;2004, Vol. 25 Issue 2, p1
Academic Journal
This paper reports on developments in theoretical and empirical understanding of the macroeconomic consequences of oil price shocks since 1996, when the U.S. Department of Energy sponsored a workshop summarizing the slate of understanding of the subject. Four major insights stand out. First, theoretical and empirical analyses point to intra- and intersectoral reallocations in response to shocks, generating asymmetric impacts, for oil price increases and decreases. Second, the division of responsibility for post-oil-price shock recessions between monetary policy and oil price shocks, has leaned heavily toward oil price shocks. Third, parametric .statistical techniques have identified a stable, nonlinear, relationship between oil price shocks and GDP from the late 1940s through the third quarter of 2001. Fourth, the magnitude of effect of an oil price shock on GDP, derived from impulse response functions of oil price shocks in the GDP equation of a VAR, is around -0.05 and -0.06 as an elasticity, spread over two years, where the shock threshold is a price change exceeding a three-year high.


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