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Oil Prices and the Macroeconomy

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Increases in oil prices and the funds rate have preceded every recession since the early 1970s. Oil price increases usually depress economic activity, but part of the decline in output results from the funds rate increase that typically occurs in conjunction with oil shocks; the reason is that oil shocks also increase inflationary pressures. To keep these pressures at bay, the Fed usually also increases the funds rate. Holding everything else constant, how much do an oil price shock and the ensuing funds rate increase affect GDP and inflation?

Suggested citation: “Oil Prices and the Macroeconomy,” Federal Reserve Bank of Cleveland, Economic Trends, no. 05-04, pp. 06-07, 04.01.2005.

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