Causes and Consequences of Oil Price Shocks on the UK Economy

Marco Lorusso, Luca Pieroni

Research output: Working paper

Abstract

In this paper, we assess the impact of oil price fluctuations on the UK
economy. We use an empirical strategy which allows us to decompose oil
price changes from the underlying source of the shock. Our results show
that, since the mid-1970s, oil price movements have been mainly associated
with shocks to oil demand rather than oil supply. We also find that the
consequences of oil price changes on UK macroeconomic aggregates depend
on the different types of oil shocks. While increases in global real economic
activity do not depress the UK economy in the short run, shortfalls in
crude oil supply cause an immediate fall in GDP growth. In addition, since
monetary policy depends on the nature of the shock hitting the oil market,
domestic inflation increases following a rise in the real oil price. Finally,
our results also show that in response to oil price increases, the government
deficit decreases.
Original languageEnglish
StatePublished - Nov 2015

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oil
oil supply
monetary policy
macroeconomics
inflation
Gross Domestic Product
economic activity
crude oil
market
Crude oil
Economics

Keywords

  • Oil Price Shocks, Vector Autoregressions.

Cite this

Lorusso, Marco; Pieroni, Luca / Causes and Consequences of Oil Price Shocks on the UK Economy.

2015.

Research output: Working paper

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abstract = "In this paper, we assess the impact of oil price fluctuations on the UKeconomy. We use an empirical strategy which allows us to decompose oilprice changes from the underlying source of the shock. Our results showthat, since the mid-1970s, oil price movements have been mainly associatedwith shocks to oil demand rather than oil supply. We also find that theconsequences of oil price changes on UK macroeconomic aggregates dependon the different types of oil shocks. While increases in global real economicactivity do not depress the UK economy in the short run, shortfalls incrude oil supply cause an immediate fall in GDP growth. In addition, sincemonetary policy depends on the nature of the shock hitting the oil market,domestic inflation increases following a rise in the real oil price. Finally,our results also show that in response to oil price increases, the governmentdeficit decreases.",
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Causes and Consequences of Oil Price Shocks on the UK Economy. / Lorusso, Marco; Pieroni, Luca.

2015.

Research output: Working paper

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