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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Exploring the Robustness of the Oil Price-Macroeconomy Relationship
Mark Hooker

Abstract: 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.

Keywords: Oil price shocks, Granger causality

Full paper (125 KB PDF) | Full paper (778 KB Postscript)

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Last update: January 15, 1998