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The effect of oil supply shocks on US economic activity: What have we learned?
Author(s) -
Herrera Ana María,
Rangaraju Sandeep Kumar
Publication year - 2020
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2735
Subject(s) - economics , oil supply , econometrics , oil price , elasticity (physics) , price elasticity of supply , real gross domestic product , lag , gross domestic product , price elasticity of demand , macroeconomics , monetary economics , microeconomics , computer science , engineering , mechanical engineering , computer network , materials science , composite material
Summary Estimated responses of real oil prices and US gross domestic product (GDP) to oil supply disruptions vary widely. We show that most variation is attributable to differences in identification assumptions and in the model specification. Models that allow for a large short‐run price elasticity of oil supply imply a larger response of oil prices and a larger, longer lived contraction in US real GDP. We find that, if we condition on a range of supply elasticity values supported by microeconomic estimates, the differences in the oil price responses diminishes. We also examine the role of lag length, of using pre‐1973 data, alternative measures of real economic activity and using the median response function instead of the modal structural model.