Assessing the Impact of Oil Price shocks on US Macroeconomic Indicators: A Vector Autoregressive Approach

Abstract

The present study aimed to assess the relationships between oil price shocks and the US macroeconomic indicators. This was achieved by employing VAR and VECM techniques to identify short-run and long-run relationships between oil prices, industrial production, interest rates, and inflation in the US based on monthly data covering the period from 1986 to 2023. Overall, the findings are consistent with previous theoretical and empirical studies on oil price shocks, and suggest that oil prices exert substantial influence on the US economy. Notably, oil prices contribute roughly 20 percent of the forecast error variance of industrial production, while the effect for interest rates and inflation is measured at 5 percent and 12 percent, respectively. Interest rates are affected through both short-run and long-run effects, while industrial production is mainly influenced by oil price shocks in the short run. The findings also provide evidence on the presence of asymmetric and volatility effects.