Kiel Working Papers, Kiel Institute for World Economics
No 1637:
The relationship between oil prices and long-term interest rates
Christopher Reicher and Johannes Utlaut
Abstract: We estimate a seven-variable-VAR for the U.S. economy on
postwar data using long-run restrictions, taking changes in long-run
interest rates and inflation expectations into account. We find a strong
connection between oil prices and long-run nominal interest rates which has
lasted throughout the entire postwar period. We find that a simple
off-the-shelf theoretical model of oil prices and monetary policy, where
oil prices are flexible and other prices are sticky, in fact predicts a
strong relationship if inflation and oil prices were driven by monetary
policy. The observed magnitude of this relationship is still a bit of a
puzzle, but this finding does call into question the identification
techniques commonly used to identify oil shocks
Keywords: Oil shocks, interest rates, inflation; (follow links to similar papers)
JEL-Codes: E31,; E58,; N50; (follow links to similar papers)
32 pages, July 2010
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