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Declining Effects of Oil Price Shocks



  • I am grateful to James Hamilton for his encouragement and helpful comments. I have also benefited from suggestions and comments from Takeo Hoshi, Valerie Ramey, Kwang Hwan Kim, Yong-Gook Jung, and seminar participants at UCSD and Louisiana State University. I also would like to thank two anonymous referees for their valuable comments.


In recent years, output responses to oil price shocks have not only been weaker, but have also reached their trough earlier. This paper builds a model that incorporates a realistic structure of U.S. petroleum consumption and explores three possible explanations for the changes. The possible factors considered are (i) deregulation in the transportation industry, (ii) improved energy efficiency, and (iii) a lower degree of persistence of oil price shocks. Under realistic parameter values, the three factors play an important role quantitatively, accounting for half of the reduction in the largest impact on output of an oil price shock over time.