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Oil Price Uncertainty

JOHN ELDER and APOSTOLOS SERLETIS
Journal of Money, Credit and Banking
Vol. 42, No. 6 (September 2010), pp. 1137-1159
Published by: Wiley
Stable URL: http://www.jstor.org/stable/40784879
Page Count: 23
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Oil Price Uncertainty
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Abstract

The theories of investment under uncertainty and real options predict that uncertainty about, for example, oil prices will tend to depress current investment.We reinvestigate the relationship between the price of oil and investment, focusing on the role of uncertainty about oil prices. We find that volatility in oil prices has had a negative and statistically significant effect on several measures of investment, durables consumption, and aggregate output. We also find that accounting for the effects of oil price volatility tends to exacerbate the negative dynamic response of economic activity to a negative oil price shock, while dampening the response to a positive oil price shock.

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