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The Impact of Oil Price Changes in a New Keynesian Model of the U.S. Economy

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  • Francesca Rondina

    (Department of Economics, University of Ottawa, Ottawa, ON)

Abstract

This paper studies the impact of a change in real oil prices on output and inflation in a New Keynesian model of the U.S. economy. The main goal of the analysis is to assess whether the cross-equation restrictions imposed by the model play a role in the transmission mechanism of exogenous oil price shocks. I find that the interactions between oil prices, domestic variables, and expectations implied by the New Keynesian framework generate responses that are quite modest, and that can depart from those emerging from a more unrestricted SVAR model. I also find that changes in oil prices that cannot be predicted based on the available information are, for the most part, exogenous to the U.S. economy. As such, augmenting the model to account for their possible endogeneity does not deliver substantially different results.

Suggested Citation

  • Francesca Rondina, 2017. "The Impact of Oil Price Changes in a New Keynesian Model of the U.S. Economy," Working Papers 1709E, University of Ottawa, Department of Economics.
    • Handle: RePEc:ott:wpaper:1709e
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    More about this item

    Keywords

    Oil Prices; Endogeneity; New Keynesian Model; Expectations;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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