Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/155611
Authors: 
Baumeister, Christiane
Kilian, Lutz
Zhou, Xiaoqing
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper 6369
Abstract: 
The transmission of oil price shocks has been a question of central interest in macroeconomics since the 1970s. There has been renewed interest in this question after the large and persistent fall in the real price of oil in 2014-16. In the context of this debate, Ramey (2017) makes the striking claim that the existing literature on the transmission of oil price shocks is fundamentally confused about the question of how to quantify the effect of oil price shocks. In particular, she asserts that the discretionary income effect on private consumption, which plays a central role in contemporary accounts of the transmission of oil price shocks to the U.S. economy, makes no economic sense and has no economic foundation. Ramey suggests that the literature has too often confused the terms-of-trade effect with this discretionary income effect, and she makes the case that the effects of the oil price decline of 2014-16 on private consumption are smaller for a multitude of reasons than suggested by empirical models of the discretionary income effect. We review the main arguments in Ramey (2017) and show that none of her claims hold up to scrutiny.
Subjects: 
stimulus
oil price decline
discretionary income effect
expenditure share
gasoline
net oil imports
JEL: 
C51
Q43
Document Type: 
Working Paper

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