Abstract
AbstractThis paper investigates how the University of Michigan's Index of Consumer Sentiment responds to oil price shocks. While oil supply shocks play only a limited role, the effect of aggregate demand shocks is positive for the first few months and negative thereafter. A typical other oil demand shock has a significant negative impact for up to 2 years. By studying the responses of individual survey questions, we find that expectations of future inflation and a change in real household income as well as perceived vehicle and house buying conditions are the main transmission channels of oil supply and demand shocks.
Highlights
The unprecedented boom and bust in the price of crude oil since 2000 re-aroused the interest of economists and policy makers in the origins and effects of oil price fluctuations
Besides replicating Kilian and Park’s (2009) results for the U.S, Guntner (2014a) finds that positive aggregate demand shocks, which raise the real price of crude oil, have a positive effect on national stock markets in both oil-exporting and oil-importing economies, albeit with varying persistence
Consumers are directly affected by oil price fluctuations, most of the existing literature investigates the effect of oil shocks on real GDP, inflation, or stock prices
Summary
The unprecedented boom and bust in the price of crude oil since 2000 re-aroused the interest of economists and policy makers in the origins and effects of oil price fluctuations. While introductory macroeconomic textbooks interpret oil price changes as exogenous shifts of the aggregate supply (AS) curve, Kilian (2008) does not find much evidence in favor of this cost-push shock interpretation. Instead, they might impact real economic activity through the demand side, via (perceived) changes in the purchasing power of disposable income, increased uncertainty about future economic conditions, or a reduction in consumer and investor sentiment, which induces households and firms to cut back on their consumption and investment expenditures, respectively. Given that personal consumption expenditures account for more than two thirds of U.S GDP, understanding the response of household expectations is a prerequisite for understanding the transmission of oil shocks to the U.S economy.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.