This paper proposes a New Keynesian dynamic stochastic general equilibrium model of the Chinese economy incorporating the demand of oil to study the effects of oil price shocks on the business cycle. The model answers several questions, including how monetary policy should respond to the disturbances from such shocks, and whether monetary authorities should use core inflation or headline inflation including oil price inflation as the monetary policy rule. The contributions could be summarized as follows: First, the model reveals that the oil transmission mechanism is determined by the nominal inertia, income effect, and the portfolio allocation effect. Second, both noncore inflation monetary policy and core inflation monetary policy that are simultaneously pegged to oil prices fluctuations are inferior to the monetary policy purely pegged to core inflation. Our findings suggest that the monetary policy should focus on core inflation instead of headline inflation.

We study the impact of oil price shocks on the U.S. stock market volatility. We jointly analyze three different structural oil market shocks (i.e., aggregate demand, oil supply, and oil-specific demand shocks) and stock market volatility using a structural vector autoregressive model. Identification is achieved by assuming that the price of crude oil reacts to stock market volatility only with delay. This implies that innovations to the price of crude oil are not strictly exogenous, but predetermined with respect to the stock market. We show that volatility responds significantly to oil price shocks caused by unexpected changes in aggregate and oil-specific demand, whereas the impact of supply-side shocks is negligible.

Building on Kilian and Park's (2009) structural VAR analysis of the effects of oil demand and supply shocks on the U.S. stock market, this paper focuses on the differences and commonalities of stock price responses in oil exporting and importing economies in 1974–2011. Structural oil price shocks add to our understanding of the 2008 stock market crash. I find that unexpected reductions in world oil supply do not affect stock returns in any of six OECD countries. Although an increase in global aggregate demand consistently raises oil prices and cumulative real stock returns, the effect is more persistent for oil exporters. Other, e.g., precautionary oil demand shocks have a detrimental impact on stock markets in oil-importing countries, a statistically insignificant effect for Canada, and a significantly positive effect for Norway. Oil price shocks account for a larger share of the variation in aggregate international stock returns than in national stock returns.

We study the dynamic effects of an oil price shock on key economic variables and on the current account of a small open economy. We introduce time-nonseparable preferences into a standard model of a small open economy, where imported oil is used both as an intermediate input in production and as a consumption good. Using a plausible calibration of the model, we show that the changes in output and employment are quite small, and that the current account exhibits the J-curve property, both being in line with recent empirical evidence. After an oil price increase, employment falls and the current account first deteriorates. Over time, with gradually falling expenditures, the trade balance improves sufficiently to turn the current account into a surplus. The model thus provides a plausible explanation of recent empirical findings.

This paper studies how monetary policy should react to oil shocks in a microfounded model with staggered price-setting and oil as an input in a CES production function. In particular, we extend Benigno and Woodford [Journal of the European Economic Association 3 (6) (2005), 1–52] to obtain a second-order approximation to the expected utility of the representative household when the steady state is distorted and the economy is hit by oil price shocks. The main result is that oil price shocks generate an endogenous trade-off between inflation and output stabilization when oil has low substitutability in production. We also find, in contrast to Benigno and Woodford, that this trade-off is reduced, but not eliminated, when we get rid of the effects of monopolistic distortions in the steady state. Moreover, the size of the endogenous “cost-push” shock generated by fluctuations in the oil price increases when it is more difficult to substitute other factors for oil.

This paper seeks to answer the following questions: Do oil price shocks affect firms' investment decisions? Do oil price shocks affect investment decisions differentially depending on firm-specific uncertainty? Over what time horizon do oil price shocks affect high-uncertainty firms? Is the intensity of the oil price shock important, or just its existence? It is found that oil price shocks depress firms' investment decisions, and do so differentially by depressing investment more for more uncertain firms. Oil shocks affect investment for at least the first and second year after the shock. In the short term, the mere existence of a shock drives most of the effect. In the long term, the intensity of the oil shock is also important. Bloom, Bond, and Van Reenan's result [Review of Economic Studies 74, 391–415 (2007)] regarding responsiveness to demand shocks being eroded at more uncertain firms for data on U.K. firms is replicated using data on U.S. firms and persists after oil shocks are considered.

The U.S. economy has experienced a reduction in volatility since the mid-1980s. In this paper we investigate the changes in the response of the economy to an oil price shock and the role of the systematic monetary policy response in accounting for changes in the response of output, prices, inventories, sales, and the overall decline in volatility. Our results suggest a smaller and more short-lived response of most macro variables during the Volcker-Greenspan period. It also appears that whereas the systematic monetary policy response dampened fluctuations in economic activity during the 1970s, it has had virtually no effect after the “Great Moderation.”

This paper uses a variant of the IMF's Global Economy Model (GEM) to examine the macroeconomic impact of the rise in energy prices since the end of 2003 in the Euro Area, the United Kingdom and the United Sates. The analysis illustrates how the impact varies across these countries based on their level of energy use and energy production. In addition, the analysis uses Euro Area simulations to consider how the macroeconomic implications depend on the factors driving higher energy prices. If labour supply or tradable sector productivity increases in emerging Asian economies are an important factor driving energy price increases, then industrial countries receive some positive terms-of-trade effects coming through non-energy tradable goods that offset some of the negative implications of permanently higher real energy prices. The stronger are the industrial countries' trade links with emerging Asia, the larger will be the offsets.