Oil Price Shocks and U.S. Economic Activity: An International Perspective

Abstract

Oil price shocks seem to have had greater effects on U.S. economic activity in the 1970s and early 80s than in the 2000s. Such differences could arise from a variety of factorsincluding unrelated productivity shocks and differing causes for the gains in oil prices. We employ Bayesian methods with a dynamic stochastic general equilibrium model of world economic activity to identify the various sources of oil price shocks and economic fluctuation, and to estimate the effects on U.S. economic activity. We find that changes in oil prices are best understood as endogenous, oil price shocks in the earlier periods and the 2000s reflect differing mixes of shifts in oil supply and demand, and the sources of oil price shocks matter for economic activity. We also find that U.S. output fluctuations owe mostly to domestic shockswith productivity shocks contributing to weakness in the 1970s and 80s and strength in the 2000s.