Impulse response functions, Macroeconomics

Assignment Help:

After an oil price shock was impacted upon the other five variables in the model, many interesting results were found.

1847_Impulse response functions.png

I have already demonstrated that oil Granger causes inflation, therefore it is expected that after a shock was applied to the oil price statistic, inflation would respond. The middle right graph from Fig. 4.4 depicts the response of inflation to an oil price shock, with the analytical two-standard-error bands. Certain characteristics of the response should be noted as they are crucial in understanding the problem of the project. Firstly, for the first four quarters, it can be seen that after a shock, the inflation rate rises rather steeply by approx. 0.5. This means that in the immediate aftermath of an oil price shock, the UK inflation rate will respond by increasing. The level of inflation reaches the maximum point at the third quarter. This shows that in the short run, the impact of an oil price shock to inflation is significantly negative. Secondly, inflation then calms and reduces through the next 8-10 quarters as the shock has been absorbed by the economy, and when the oil price decreases and stabilises, inflation decreases commensurately.Finally, it can be seen that inflation will return to its normal trend pattern 20 quarters after the initial shock. Whilst this may seem surprising, the result supports the business cycle theory, that over a five year period, an economy is likely to see peaks and troughs in its macroeconomic variables. This result follows economic theory, that due to its price inelasticity (Cooper 2003) and importance to the UK economy, should a shock be impacted upon oil prices, consumption of oil will not significantly drop, resulting in a form of cost-push inflation.


Related Discussions:- Impulse response functions

The world economy , The financial crisis that hit the United States first a...

The financial crisis that hit the United States first and then the world economy starting in fall 2007 meant that the future prospects of many firms looked gloomy at best for some

The goals of macroeconomic policy, THE GOALS OF MACROECONOMIC POLICY  E...

THE GOALS OF MACROECONOMIC POLICY  Economic analysis attempts to explain why problems arise in the economy and how these problems can be dealt with. It is, therefore, indispens

Accounting system-example iii, ACCOUNTING SYSTEM-EXAMPLE III  Now suppo...

ACCOUNTING SYSTEM-EXAMPLE III  Now suppose the Jam Co. manufactures some herbal chemicals and flavors which it sells partly to Extracts Co., partly to Bottling Co., some are co

Balance of payments, factors that causes the shifts in balance of payments...

factors that causes the shifts in balance of payments

Elucidate the rise in gdp, How much does GDP rise in each of the following ...

How much does GDP rise in each of the following scenarios: 1. During a recession, the government raises unemploymemnt benefits by $100 million. 2. A new US airline purchases

Economic growth cyclic fluctuations, Economic Growth Cyclic Fluctuations ...

Economic Growth Cyclic Fluctuations At this stage, it is useful for us to understand the difference between economic growth and cyclical fluctuations. Economic Growth Econo

Investment multiplier, what is the formula for calculating investment multi...

what is the formula for calculating investment multiplier for 4 sector economy?

Aggregate demand with inflation, Aggregate demand with inflation In pre...

Aggregate demand with inflation In previous versions of Keynesian model, Components of aggregate demand did not depend on P. In IS-LM and in AS-AD models, investments depended

Composition and direction of trade, Composition and Direction of Trade: ...

Composition and Direction of Trade: The impact of trade reforms can be observed from the changing structure of India's  foreign  trade in  terms of diversity  of  production

State the term fall in the exchange rate, state the term fall in the exchan...

state the term fall in the exchange rate A fall in the exchange rate must make UK exports price competitive in international markets and increase demand for them. This should

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd