A Simultaneous Equations Model for World Crude Oil and Natural Gas Markets, Issues 2005-2032
A model for world crude oil and natural gas markets is estimated. It confirms low price and high income elasticities of demand for both crude oil and natural gas, which explains the market power of oil producers and price volatility following shocks. The paper establishes a relationship between oil prices, changes in the nominal effective exchange rate (NEER) of the U.S. dollar, and the U.S. interest rates, thereby identifying demand shocks arising from monetary policy. Both interest rates and the NEER are shown to influence crude prices inversely. The results imply that crude oil prices should be included in the policy rule equation of an inflation targeting model.
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Relation Between Oil Prices Interest Rates and the U S Dollar NEER
Appendix Data Sources
aggregate demand Crude oil demand crude oil output crude oil prices crude oil supply demand and supply demand for crude demand for natural demand Price elasticity dollar's NEER endogenous variables exogenous Federal funds rate gas demand Price Gas output elasticity gas supply Price Impulse responses income LR income increase in crude inelasticity interest rate shock International Energy Agency International Financial Statistics long-run demand Long-Run Elasticities long-run supply LR price LR monetary policy Natural gas demand natural gas markets natural gas output natural gas prices natural gas supply NEER shock Response oil and natural oil demand Price oil shock oil supply Price percent period Price elasticity 844 price LR income price LR price ratio in parenthesis rational expectations real GDP Response to interest Response to NEER responses of crude Sample short-run price elasticity supply function supply of crude supply of natural supply Price elasticity Supply shocks U.S. dollars vector World Crude Oil