Time-Varying E¤ects of Oil Supply Shocks on the US Economy

We investigate how the dynamic e¤ects of oil supply shocks on the US economy have changed over time. We …rst document a remarkable structural change in the oil market itself, i.e. a considerably steeper, hence, less elastic oil demand curve since the mid-eighties. Accordingly, a typical oil supply shock is currently characterized by a much smaller impact on world oil production and a greater e¤ect on the real price of crude oil, but has a similar impact on US output and in‡ation as in the 1970s. Second, we …nd a smaller role for oil supply shocks in accounting for real oil price variability over time, implying that current oil price ‡uctuations are more demand driven. Finally, while unfavorable oil supply disturbances explain little of the "Great In‡ation", they seem to have contributed to the 1974/75, early 1980s and 1990s recessions but also dampened the economic boom at the end of the millennium. JEL classi…cation: E31, E32, Q43 Keywords: Oil prices, vector autoregressions, time-varying coe¢ cients We thank Luca Benati, Jean Boivin, Luca Gambetti, Domenico Giannone, James Hamilton, Morten Ravn, Frank Smets, Herman van Dijk and Timo Wollmershäuser as well as conference participants at the CESifo Munich, IWH Halle, EEA-ESEM Milan and seminar participants at the Erasmus University Rotterdam and the University of Kent for their useful comments and suggestions. Special thanks to Lutz Kilian for many insightful discussions and feedback on an earlier version of the paper. We acknowledge …nancial support from the Interuniversity Attraction Poles Programme Belgian Science Policy [Contract No. P6/07] and the Belgian National Science Foundation. All remaining errors are ours.