Oil shocks and the US economy in a data-rich model

Are all oil price shocks the same? We investigate the effects of three types of global crude oil price shocks using a factor augmented VAR framework and 185 monthly macroeconomic indicators from 1978 to 2017. Our results indicate that while both demand and supply driven oil price shocks lead to a significant increase in the global crude oil price and high degree of pass-through to US consumer and producer prices, oil specific precautionary demand shocks are the main drivers of fluctuations in the price of crude oil and the US price level, followed by global economic activity oil demand shocks. Further, while increases in the price of oil triggered by oil supply shocks lower US economic activity, those triggered by global economic activity oil demand shocks are associated with increased US economic activity. Our results suggest the need for monetary policy to stabilize the pass-through from global crude oil prices to domestic inflation.

Automated summary

Different types of global crude oil price shocks have different effects, with demand and supply driven shocks leading to price increases and affecting US prices; precautionary demand shocks for specific oil drive fluctuations in oil prices and US price levels, while demand-driven shocks have different impacts on US economic activity.