Traditional literature on energy economics gives a central role to exogenous political events (supply shocks) or to global economic growth (aggregate demand shock) in modeling the oil market. However, more recent literature claims that the increased precautionary demand for oil triggered by increased uncertainty about a future oil supply shortfall is also driving the price of oil. Based on this motivation, in the first chapter, we propose to build a DSGE model to explore macroeconomic consequences of precautionary demand motives in the crude oil market. The intuition behind the precautionary demand is that since firms, using oil as an input in their production process, are concerned about the future oil prices, it is reasonable to think that in the case of uncertainty about future oil supply (such as a highly expected war in the Middle East), they will buy futures and/or forward contracts to guarantee a future price and quantity. We simulate the effects of demand shocks in the oil market on macroeconomic variables, such as GDP and inflation. We find that under baseline Taylor-type interest rate rule, real oil price, inflation and output loss overshoot and go down below steady state at the next period if uncertainties are not realized. However, if the shock is realized, i.e. followed by an actual supply shock, the effect on inflation and output loss is high and persistent.
Second chapter analyzes the effect of storage market on the monetary policy formulation as a response to an oil price shock. Some recent literature suggests that although high oil prices contributed to recessions, they have never had a pivotal role in the creation of those economic downturns. A general consensus is that the decline in output and employment was due to the rise in interest rates, resulting from the Fed’s endogenous response to the higher inflation induced by oil price shocks. However, traditional literature assumes that oil price shocks are exogenous to the U.S economy and they ignore the storage market for the crude oil. In this regard, a model with an endogenous (demand shock) or exogenous (supply shock) price shock may produce a totally different monetary policy proposal when there exists a market for storage for the crude oil. The rationale behind this idea is that when goods’ prices are sticky in the economy, the monetary authority can effect the level of inventories through the changes in the real interest rates. Thus, lower interest rate rules, as proposed in the literature, will cause additional oil supply scarcity in the spot market. Therefore, an optimal monetary policy that maximizes the welfare in the economy should consider the adverse affect of low interest rates on the crude oil market.
| Identifer | oai:union.ndltd.org:RICE/oai:scholarship.rice.edu:1911/72031 |
| Date | 16 September 2013 |
| Creators | Rizvanoghlu, Islam |
| Contributors | Temzelides, Ted |
| Source Sets | Rice University |
| Language | English |
| Detected Language | English |
| Type | thesis, text |
| Format | application/pdf |
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