Working Paper: CEPR ID: DP6559
Authors: Lutz Kilian
Abstract: Large fluctuations in energy prices have been a distinguishing characteristic of the U.S. economy since the 1970s. Turmoil in the Middle East, rising energy prices in the U.S. and evidence of global warming recently have reignited interest in the link between energy prices and economic performance. This paper addresses a number of the key issues in this debate: What are energy price shocks and where do they come from? How responsive is energy demand to changes in energy prices? How do consumers? expenditure patterns evolve in response to energy price shocks? How do energy price shocks affect real output, inflation, stock markets and the balance-of-payments? Why do energy price increases seem to cause recessions, but energy price decreases do not seem to cause expansions? Why has there been a surge in gasoline prices in recent years? Why has this new energy price shock not caused a recession so far? Have the effects of energy price shocks waned since the 1980s and, if so, why? As the paper demonstrates, it is critical to account for the endogeneity of energy prices and to differentiate between the effects of demand and supply shocks in energy markets, when answering these questions.
Keywords: asymmetry; causality; channels of transmission; crude oil; elasticity; gasoline price shocks; propagation
JEL Codes: E21; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Energy price increases (Q41) | Consumer discretionary income (D12) |
| Consumer discretionary income (D12) | Spending on non-energy goods and services (H59) |
| Energy price increases (Q41) | Spending on non-energy goods and services (H59) |
| Energy price shocks (Q43) | Elasticity of energy demand (Q41) |
| Energy price increases (Q41) | Economic impacts (F69) |
| Responsiveness of consumer spending to energy prices (D12) | Decline over time (C41) |
| Recent energy price shocks (Q43) | Muted economic responses (E65) |