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Oil Price Volatility And U.S. Macroeconomic Performance

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  • TIMOTHY J. CONSIDINE

Abstract

This study uses a model with explicit energy sector linkages to estimate the macroeconomic impacts of the 1986 collapse in energy prices. The model combines features of neoclassical macroeconomics to estimate final demand spending and of general equilibrium analysis to estimate substitution possibilities. The model allows price and wage rigidities yet permits interfuel and input substitutions. The simulation results suggest three conclusions. First, the most significant macroeconomic impact of the 1986 oil price reduction is the sharp drop in inflation. Second, output and employment gains are relatively small due to the sharp drop in energy sector output. Finally, the estimated gain in real output due to lower energy prices is close to the output loss resulting from the trade deficit increase during 1986. This may be one reason why no substantial increase in economic growth occurred following the 1986 collapse in energy prices.

Suggested Citation

  • Timothy J. Considine, 1988. "Oil Price Volatility And U.S. Macroeconomic Performance," Contemporary Economic Policy, Western Economic Association International, vol. 6(3), pages 83-96, July.
    • Handle: RePEc:bla:coecpo:v:6:y:1988:i:3:p:83-96
    DOI: 10.1111/j.1465-7287.1988.tb00295.x
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    References listed on IDEAS

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    1. Darby, Michael R, 1982. "The Price of Oil and World Inflation and Recession," American Economic Review, American Economic Association, vol. 72(4), pages 738-751, September.
    2. Robert S. Pindyck, 1980. "Energy Price Increases and Macroeconomic Policy," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-20.
    3. Dermot Gately, 1986. "Lessons from the 1986 Oil Price Collapse," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 237-284.
    4. Gordon, Robert J, 1984. "Supply Shocks and Monetary Policy Revisited," American Economic Review, American Economic Association, vol. 74(2), pages 38-43, May.
    5. Michael Bruno, 1984. "Raw Materials, Profits, and the Productivity Slowdown," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(1), pages 1-29.
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