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Oil Efficiency, Demand, and Prices: a Tale of Ups and Downs

Author

Listed:
  • Luca Guerrieri

    (Federal Reserve Board)

  • Martin Bodenstein

    (Asian Development Bank and Federal Reserve Board)

Abstract
The macroeconomic implications of oil price fluctuations vary according to their sources. Our estimated two-country DSGE model distinguishes between country-specific oil supply shocks, various domestic and foreign activity shocks, and oil efficiency shocks. Changes in foreign oil efficiency, modeled as factor-augmenting technology, were the key driver of fluctuations in oil prices between 1984 and 2008, but had modest effects on U.S. activity. A pickup in foreign activity played an important role in the 2003-2008 oil price runup. Beyond quantifying the responses of oil prices and economic activity, our model informs about the propagation mechanisms. We find evidence that nonoil trade linkages are an important transmission channel for shocks that affect oil prices. Conversely, nominal rigidities and monetary policy are not.

Suggested Citation

  • Luca Guerrieri & Martin Bodenstein, 2012. "Oil Efficiency, Demand, and Prices: a Tale of Ups and Downs," 2012 Meeting Papers 25, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:25
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    7. Bergholt, Drago & Larsen, Vegard H. & Seneca, Martin, 2019. "Business cycles in an oil economy," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 283-303.
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    9. Prest, Brian C. & Fell, Harrison & Gordon, Deborah & Conway, TJ, 2024. "Estimating the emissions reductions from supply-side fossil fuel interventions," Energy Economics, Elsevier, vol. 136(C).
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    13. Liu, Qing & Shi, Kang & Wu, Zhouheng & Xu, Juanyi, 2014. "Oil price stabilization and global welfare," Journal of Development Economics, Elsevier, vol. 111(C), pages 246-260.
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