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Modeling the Asymmetric Effects of an Oil Price Shock

Author

Listed:
  • Lance J Bachmeier

    (Kansas State University)

  • Benjamin D Keen

    (University of Oklahoma)

Abstract

This paper documents that an oil price increase generates a larger decline in output when the oil price hits a near-term high. We develop a New Keynesian model with energy and a downward nominal wage rigidity that generates asymmetric responses of the macroeconomy to energy price shocks. Specifically, a large energy price increase pushes down the real wage enough that the downward nominal wage constraint binds for several periods, which causes firms to reduce their output further. Since that mechanism is unimportant when energy prices fall, the downward nominal wage constraint causes output to react asymmetrically to oil price shocks.

Suggested Citation

  • Lance J Bachmeier & Benjamin D Keen, 2023. "Modeling the Asymmetric Effects of an Oil Price Shock," International Journal of Central Banking, International Journal of Central Banking, vol. 19(3), pages 1-47, August.
    • Handle: RePEc:ijc:ijcjou:y:2023:q:3:a:1
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    References listed on IDEAS

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    1. Lutz Kilian & Logan T. Lewis, 2011. "Does the Fed Respond to Oil Price Shocks?," Economic Journal, Royal Economic Society, vol. 121(555), pages 1047-1072, September.
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    6. Rajeev Dhawan & Karsten Jeske, 2008. "Energy Price Shocks and the Macroeconomy: The Role of Consumer Durables," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1357-1377, October.
    7. Herrera, Ana María & Lagalo, Latika Gupta & Wada, Tatsuma, 2011. "Oil Price Shocks And Industrial Production: Is The Relationship Linear?," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S3), pages 472-497, November.
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    Cited by:

    1. Sardar, Naafey & Qureshi, Irfan, 2024. "Revisiting the relationship between oil supply news shocks and U.S. economic activity: Role of the zero lower bound," Energy Economics, Elsevier, vol. 132(C).

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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