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THE INFLATIONARY IMPACT OF OIL PRICE SHOCKS: A VECTOR AUTOREGRESSIVE STUDY
Author(s) -
Deravi Keivan,
Hegji Charles E.
Publication year - 1992
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1002/j.1873-5924.1992.tb00552.x
Subject(s) - economics , oil price , autoregressive model , econometrics , shock (circulatory) , vector autoregression , impulse response , inflation (cosmology) , forecast error , impulse (physics) , supply shock , monetary economics , monetary policy , mathematics , medicine , mathematical analysis , physics , quantum mechanics , theoretical physics
The paper estimates a seven‐variable vector autoregressive model of the U.S. economy over the period 1970.1 to 1990.4. Forecast error variance and impulse analysis are performed on the estimated system to determine the inflationary impact of increases in the price of oil over this period. The analysis shows that a negligible percentage of inflation's forecast error variance can be attributable to increases in the price of oil. Moreover, the impulse simulations result in negative Consumer Price responses to increases in the price of oil. The primary response to a positive shock in the price of oil was a decrease in real output. The results, in general, support previous studies emphasizing the demand‐side of response to oil price shocks rather than shifts in aggregate supply.