Hostname: page-component-5b777bbd6c-vfh8q Total loading time: 0 Render date: 2025-06-21T14:02:11.299Z Has data issue: false hasContentIssue false
  • English
  • Français

MACROECONOMIC EFFECTS OF ENERGY PRICE SHOCKS ON THE BUSINESS CYCLE

Published online by Cambridge University Press:  06 July 2015

Bao Tan Huynh
Bao Tan Huynh*
Affiliation:
School of Economics, Singapore Management University
*
Address correspondence to: Bao Tan Huynh, School of Economics, Singapore Management University, 90 Stamford Road, Singapore178903; e-mail: bthuynh.2010@phdecons.smu.edu.sg.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper proposes a framework of endogenous energy production with convex costs to investigate the general equilibrium effects of energy price shocks on the business cycle. This framework explicitly models the consumption of durables and nondurables and implements a high complementarity between energy and the usage of durables and capital. The model predicts energy price elasticities of various consumption variables that fall within reasonable agreement with empirical estimates. Convex costs in energy production produce energy price and energy supply dynamics that tallies well with empirical behavior. Our analysis confirms in a theoretical setting recent observations that not all energy price shocks are the same. They can be distinct in terms of energy price dynamics and impact on the business cycle, as well as energy price elasticities of various macro variables that can be useful indicators for their underlying causes.

Keywords

EnergyEnergy Price ShockBusiness Cycle
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 3 , April 2016 , pp. 623 - 642
Copyright
Copyright © Cambridge University Press 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

REFERENCES

Arora, Vipin and Gomis-Porqueras, Pedro (2011) Oil Price Dynamics in a Real Business Cycle Model. Center for Applied Macroeconomic Analysis working paper.CrossRefGoogle Scholar
Backus, David K. and Crucini, Mario J. (2000) Oil prices and the terms of trade. Journal of International Economics 50 (1), 185–213.CrossRefGoogle Scholar
Barsky, Robert B. and Kilian, Lutz (2002) Do we really know that oil caused the great stagflation? A monetary alternative. In Bernanke, B. and Rogoff, K. (eds.), NBER Macroeconomics Annual 2001, Vol. 16, pp. 137–183. Cambridge, MA: MIT Press.Google Scholar
Baumeister, Christiane and Peersman, Gert (2013) Time-varying effects of oil supply shocks on the US economy. American Economic Journal: Macroeconomics 5 (4), 1–28.Google Scholar
Berndt, Ernst R. and Wood, David O. (1975) Technology, prices, and the derived demand for energy. Review of Economics and Statistics 57 (3), 259–268.CrossRefGoogle Scholar
Bodenstein, Martin, Erceg, Christopher J., and Guerrieri, Luca (2008) Optimal monetary policy with distinct core and headline inflation rates. Journal of Monetary Economics 55, S18–S33.CrossRefGoogle Scholar
Bodenstein, Martin, Erceg, Christopher J., and Guerrieri, Luca (2011) Oil shocks and external adjustment. Journal of International Economics 83 (2), 168–184.CrossRefGoogle Scholar
Bodenstein, Martin and Guerrieri, Lucas (2011) Oil Efficiency, Demand and Prices: A Tale of Ups and Downs. International Finance Discussion Paper 1031, Board of Governors of the Federal Reserve System.CrossRefGoogle Scholar
Bodenstein, Martin, Guerrieri, Lucas, and Kilian, Lutz (2012) Monetary policy responses to oil price fluctuations. IMF Economic Review 60 (4), 470–504.CrossRefGoogle Scholar
Dhawan, Rajeev and Jeske, Karsten (2008) Energy price shocks and the macroeconomy: The role of consumer durables. Journal of Money, Credit and Banking 40 (7), 1357–1377.CrossRefGoogle Scholar
Edelstein, Paul and Kilian, Lutz (2009) How sensitive are consumer expenditures to retail energy prices? Journal of Monetary Economics 56 (6), 766–779.CrossRefGoogle Scholar
Elder, John and Serletis, Apostolos (2011) Volatility in oil prices and manufacturing activity: An investigation of real options. Macroeconomic Dynamics 15 (S3), 379–395.CrossRefGoogle Scholar
Finn, Mary G. (2000) Perfect competition and the effects of energy price increases on economic activity. Journal of Money, Credit and Banking 32 (3), 400–416.CrossRefGoogle Scholar
Kilian, Lutz (2008) The economic effects of energy price shocks. Journal of Economic Literature 46 (4), 871–909.CrossRefGoogle Scholar
Kilian, Lutz (2009) Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review 99 (3), 1053–1069.CrossRefGoogle Scholar
Kilian, Lutz and Lewis, Logan T. (2011) Does the Fed respond to oil price shocks? Economic Journal 121 (555), 1047–1072.CrossRefGoogle Scholar
Kilian, Lutz and Murphy, Daniel P. (2012) Why agnostic sign restrictions are not enough: Understanding the dynamics of oil market VAR models. Journal of the European Economic Association 10 (5), 1166–1188.CrossRefGoogle Scholar
Kilian, Lutz and Murphy, Daniel P. (2014) The role of inventories and speculative trading in the global market for crude oil. Journal of Applied Econometrics 29 (3), 454–478.CrossRefGoogle Scholar
Kilian, Lutz and Vega, Clara (2011) Do energy prices respond to U.S. macroeconomic news? A test of the hypothesis of predetermined energy prices. Review of Economics and Statistics 93 (2), 660–671.CrossRefGoogle Scholar
Kilian, Lutz and Vigfusson, Robert J. (2011a) Are the responses of the U.S. economy asymmetric in energy price increases and decreases? Quantitative Economics 2 (3), 419–453.CrossRefGoogle Scholar
Kilian, Lutz and Vigfusson, Robert J. (2011b) Nonlinearities in the oil price-output relationship. Macroeconomic Dynamics 15 (S3), 337–363.CrossRefGoogle Scholar
Kim, In-Moo and Loungani, Prakash (1992) The role of energy in real business cycles. Journal of Monetary Economics 29 (2), 173–189.CrossRefGoogle Scholar
Krichene, Noureddine (2005) A Simultaneous Equations Model for World Crude Oil and Natural Gas Markets. IMF working paper 05/32.Google Scholar
Lee, Chien-Chiang and Lee, Jun-De (2010) A panel data analysis of the demand for total energy and electricity in OECD countries. Energy Journal 31 (1), 1–23.CrossRefGoogle Scholar
Maddala, Gangadharrao S., Trost, Robert P., Li, Hongyi, and Joutz, Frederick (1997) Estimation of short-run and long-run elasticities of energy demand from panel data using shrinkage estimators. Journal of Business and Economic Statistics 15 (1), 90–100.Google Scholar
Nakov, Anton and Pescatori, Andrea (2010) Monetary policy trade-offs with a dominant oil producer. Journal of Money, Credit and Banking 41 (1), 1–32.CrossRefGoogle Scholar
Rahman, Sajjadur and Serletis, Apostolos (2011) The asymmetric effects of oil price shocks. Macro-economic Dynamics 15 (S3), 437–471.CrossRefGoogle Scholar
Rotemberg, Julio J. and Woodford, Michael (1996) Imperfect competition and the effects of energy price increases on economic activity. Journal of Money, Credit and Banking 28 (4), 550–577.CrossRefGoogle Scholar