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Oil Price Uncertainty


  • The authors thank, without implication, James Brox, James Hamilton, Lutz Kilian, and the Editor, Pok-sang Lam, for comments on an earlier paper that was originally circulated under the same title in 2006.


The theories of investment under uncertainty and real options predict that uncertainty about, for example, oil prices will tend to depress current investment. We reinvestigate the relationship between the price of oil and investment, focusing on the role of uncertainty about oil prices. We find that volatility in oil prices has had a negative and statistically significant effect on several measures of investment, durables consumption, and aggregate output. We also find that accounting for the effects of oil price volatility tends to exacerbate the negative dynamic response of economic activity to a negative oil price shock, while dampening the response to a positive oil price shock.

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