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Essays on Fiscal Policy and Oil Price Shocks


In my dissertation, I use cutting-edge time series econometric models to explore how the effects of government spending shocks change with the state of the economy, how to identify the effects of oil price changes induced by different reasons, and why oil price shocks seem to be much less important nowadays than decades ago.

Chapter 1 builds a Markov-switching structural VAR to estimate state-dependent government spending multipliers in the U.S. We show that the multipliers are statistically larger during recessions than during expansions, although smaller than 1 in both periods. Our model has two features. First, we combine quantitative data and qualitative indicators to infer the regimes of the economy across which the multipliers differ. Second, we propose a recursive method to estimate impulse response functions that allows the economy to switch regimes after the shock. We argue that these two features are important for reconciling the main findings in previous studies.

Chapter 2 estimates a standard structural VAR of the global oil market using both external and internal instrumental variables. I find that a negative oil supply shock leads to a delayed but significant decline in economic activity. Whereas oil consumption demand shocks do not have a significant effect on economic activity, a positive shock to oil inventory demand results in significant declines in oil production and economic activity at the same time. Furthermore, I show that oil price movements are mostly driven by shocks to oil consumption demand.

Chapter 3 revisits the evidence in Blanchard and Gali (2010) that the effects of oil price shocks have diminished since the mid-1980s. I show that the apparent instability in the oil price-macroeconomy relationship they find can be accounted for by the endogeneity of oil price changes and the lower energy share in consumption in recent decades. When these two factors are taken into account, the effects of oil price shocks on real economic activity appear to be stable over time. Nevertheless, the impact of oil prices on inflation has noticeably weakened over time.

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