December 1997

Exploring the Robustness of the Oil Price-Macroeconomy Relationship

Mark Hooker


This paper reexamines the oil price-macroeconomy relationship with rolling Granger causality and structural stability tests. It finds that this relationship broke down amidst the falling oil prices and market collapse of the 1980s, suggesting misspecification of the oil price rather than a weakened relationship. Some proposed respecifications of the oil price yield considerable improvements, although they are not sufficient to achieve Granger causality of output unless interest rates are excluded from the VAR. There is some support for the explanation that oil prices affect the economy indirectly by inducing monetary policy responses, but this is incomplete and some evidence of misspecification remains.

Full paper (778 KB Postscript)

Keywords: Oil price shocks, Granger causality

PDF: Full Paper

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