The oil price-macroeconomy relationship revisted

Abstract

Our study aims to evaluate the Mundell-Fleming model ability to predict the effects from a oil price shock to output and interest rates by analyzing data, from the last thirty years, by using a VAR-model. Our results show an asymmetric effect between oil price and GDP growth while the oil price-interest rate relationship partly holds. The conclusion is thus that the Mundell-Fleming theoretical framework performs badly in its predictions on oil price changes effect on output. We also test if financial stress (FSI) is relevant when analyzing the oil-macroeconomy relationship. Our conclusion is that the FSI is relevant when studying the oil price-macroeconomy relationship and needs to be studied further and on a larger sample.