Federal Reserve Bank of Dallas

About: Federal Reserve Bank of Dallas is a other organization based out in Dallas, Texas, United States. It is known for research contribution in the topics: Monetary policy & Inflation. The organization has 196 authors who have published 994 publications receiving 35508 citations.

Not All Oil Price Shocks are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market

Abstract: Using a newly developed measure of global real economic activity, a structural decomposition of the real price of crude oil in four components is proposed: oil supply shocks driven by political events in OPEC countries; other oil supply shocks; aggregate shocks to the demand for industrial commodities; and demand shocks that are specific to the crude oil market. The latter shock is designed to capture shifts in the price of oil driven by higher precautionary demand associated with concerns about the availability of future oil supplies. The paper quantifies the magnitude and timing of these shocks, their dynamic effects on the real price of oil and their relative importance in determining the real price of oil during 1975-2005. The analysis also sheds light on the origins of the major oil price shocks since 1979. Distinguishing between the sources of higher oil prices is shown to be crucial for assessing the effect of higher oil prices on U.S. real GDP and CPI inflation. It is shown that policies aimed at dealing with higher oil prices must take careful account of the origins of higher oil prices. The paper also quantifies the extent to which the macroeconomic performance of the U.S. since the mid-1970s has been determined by the external economic shocks driving the real price of oil as opposed to domestic economic factors and policies.

The Economic Effects of Energy Price Shocks

Abstract: Large fluctuations in energy prices have been a distinguishing characteristic of the U.S. economy since the 1970s. Turmoil in the Middle East, rising energy prices in the U.S. and evidence of global warming recently have reignited interest in the link between energy prices and economic performance. This paper addresses a number of the key issues in this debate: What are energy price shocks and where do they come from? How responsive is energy demand to changes in energy prices? How do consumers' expenditure patterns evolve in response to energy price shocks? How do energy price shocks affect real output, inflation, stock markets and the balance-of-payments? Why do energy price increases seem to cause recessions, but energy price decreases do not seem to cause expansions? Why has there been a surge in gasoline prices in recent years? Why has this new energy price shock not caused a recession so far? Have the effects of energy price shocks waned since the 1980s and, if so, why? As the paper demonstrates, it is critical to account for the endogeneity of energy prices and to differentiate between the effects of demand and supply shocks in energy markets, when answering these questions.

Exogenous Oil Supply Shocks: How Big are They and How Much Do They Matter for the Us Economy?

Abstract: Since the oil crises of the 1970s there has been strong interest in the question of how oil production shortfalls caused by wars and other exogenous political events in OPEC countries affect oil prices, US real GDP growth and US CPI inflation. This study focuses on the modern OPEC period since 1973. The results differ along a number of dimensions from the conventional wisdom. First, it is shown that under reasonable assumptions the timing, magnitude and even the sign of exogenous oil supply shocks may differ greatly from current state-of-the-art estimates. Second, the common view that the case for the exogeneity of at least the major oil price shocks is strong is supported by the data for the 1980/81 and 1990/91 oil price shocks, but not for other oil price shocks. Notably, statistical measures of the net oil price increase relative to the recent past do not represent the exogenous component of oil prices. In fact, only a small fraction of the observed oil price increases during crisis periods can be attributed to exogenous oil production disruptions. Third, compared to previous indirect estimates of the effects of exogenous supply disruptions on real GDP growth that treated major oil price increases as exogenous, the direct estimates obtained in this paper suggest a sharp drop after five quarters rather than an immediate and sustained reduction in economic growth for a year. They also suggest a spike in CPI inflation three quarters after the exogenous oil supply shock rather than a sustained increase in inflation, as is sometimes conjectured. Finally, the results of this paper put into perspective the importance of exogenous oil production shortfalls in the Middle East. It is shown that exogenous oil supply shocks made remarkably little difference overall for the evolution of US real GDP growth and CPI inflation since the 1970s, although they did matter for some historical episodes.

Why is it so Difficult to Beat the Random Walk Rorecast of Exchange Rates

Abstract: We propose an exchange rate model that can explain both the observed volatility and the persistence of real and nominal exchange rate movements and thus in some measure resolves Rogoff's (1996) purchasing power parity puzzle. Our analysis reconciles the well-known difficulties in beating the random walk forecast model with the statistical evidence of nonlinear mean reversion in deviations from fundamentals. Our analysis also provides a compelling rationale for the long-horizon predictability of exchange rates. We find strong empirical support for long-horizon predictability, and we explain why it is difficult to exploit this predictability in real-time forecasts. Our results not only lend support to economists' beliefs that the exchange rate is inherently predictable, but they also help us to understand the reluctance of applied forecasters to abandon chartist methods in favor of models based on economic fundamentals.