Inventories, oil shocks, and aggregate economic behavior

This dissertation examines the relationship between oil price shocks and aggregate economic behavior in the U.S. The first chapter addresses the effects of changes in the price of crude oil on the manufacturing sector in VAR regressions and in a structural linear quadratic inventory model. It finds that oil price increases lead to reductions in manufacturing activity while oil price falls are not followed by booms. This asymmetry in the response of the manufacturing activity, the changes in the composition of the demand, and the large variations in sales of key investment and consumption goods favor a multi-channel transmission mechanism. The analysis shows that differences in the response of the various industrial sectors are determined by the cost structure of the industry as well as by the dynamics of the demand, cost and oil shocks. Positive oil price shocks are first transmitted from the transportation equipment industry to sectors such as primary metals products, rubber and plastics and textiles, later affecting the remaining sectors and the aggregates. In the short run inventories act as a buffer however, one and a half years after the shock significant production cuts do take place. Sluggishness in the response of aggregate output can be accounted by the behavior of inventories as well as by the time lags implied in the propagation from one industry to the remaining sectors and the aggregate.;The second chapter studies the role of oil prices and monetary policy in accounting for business cycles in an identified VAR framework. It finds that the slowdown in GDP growth that follows an oil shock can not be solely explained by the response of the Fed's monetary policy. An "exogenous" monetary policy that holds the fed funds rate fixed would exert a large expansionary effect. Nevertheless, conditional on this policy, the reduction in economic activity persists and the price level increases leading to a sharp reduction in the short-term interest rate. In addition, the analysis shows that this policy is unlikely from the perspective of the private agents, given the historical behavior of the U.S. monetary policy.