Working Paper: NBER ID: w16067
Authors: Valerie A. Ramey; Daniel J. Vine
Abstract: This paper studies the impact of oil shocks on the U.S. economy--and on the motor vehicle industry in particular--and re-examines whether the relationship has changed over time. We find remarkable stability in the response of aggregate real variables to oil shocks once we account for the extra costs imposed on the economy in the 1970s by price controls and a complex system of entitlements that led to some rationing and shortages. To investigate further why the response of real variables to oil shocks has not declined over time, we focus on the motor vehicle industry, which is considered the most important channel through which oil shocks affect the economy. We find that, contrary to common perceptions, the share of motor vehicles in total U.S. goods production has shown little decline over time. Moreover, within the motor vehicle industry, the effects of oil shocks on the mix of vehicle sold and on capacity utilization appear to have been proportional in recent decades to the effects observed in the 1970s.
Keywords: oil shocks; motor vehicle industry; US economy; price controls; economic impact
JEL Codes: E2; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumer anxiety over fuel prices (Q41) | Motor vehicle industry (L62) |
| Shifts in vehicle demand (R48) | Motor vehicle industry (L62) |
| Shortage-adjusted measures of oil prices (Q31) | Economic impact of oil shocks (Q43) |
| Oil price shocks (Q43) | Aggregate real variables (C39) |
| Oil price shocks (Q43) | Motor vehicle consumption (R48) |
| Oil price shocks (Q43) | Capacity utilization (L97) |