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Measuring effect of energy price
increase on consumer spending
Key parameter:
αt = dollar expenditures on energy divided by
total dollar expenditures
E.g., if
• 5% of your spending goes to energy (αt = 0.05)
• energy price goes up 20%
• you purchase same quantity of energy
then
• your saving or other spending must decline by
1%
Following Edelstein and Kilian (2007):
p t relative price of energy
x t 100 t1 ln
p t /p t1 
y t  0 
6
k1
k y t1 
6
k1
k x t1 
t
They estimated with monthly data
through t 2006:M7
Pre-2007 estimated impulse-response function (and 95% confidence
intervals) relating 100 times log of real consumption spending to x
Reproduces Figure 8a in Edelstein and Kilian (2007)
Pre-2007 estimated impulse-response functions.
Reproduces Figure 8b-d in Edelstein and Kilian (2007)
Pre-2007 estimated impulse-response functions.
Reproduces Figure 8e in Edelstein and Kilian (2007)
0.0
-0.5
-1.0
GDP
autos
-1.5
-2.0
-2.5
-3.0
1974Q1
1979Q2
1981Q2
1990Q3
Average real GDP growth (annual rate) for 5 quarters beginning at
indicated date (blue) and contribution of motor vehicles and parts (brick)
Pre-2007 estimated impulse-response functions.
Reproduces Figure 11a in Edelstein and Kilian (2007)
Black: Actual value for Michigan index of consumer sentiment
Blue: forecast formed 2007:M9
Green: forecast if we knew ex-post innovations in x (energy price)
Black: 100 times log of actual real consumption
Blue: forecast formed 2007:M9
Green: forecast if we knew ex-post innovations in x (energy price)
100 times log of real GDP forecast as of 2007:Q2 conditional on knowing
subsequent oil prices (red) and not knowing (green), based on dynamic
simulation of Hamilton (2003) relation..
960
958
956
954
predicted from AR(4)
952
predicted given oil prices
950
actual
948
946
944
Aug Nov Feb May Aug Nov Feb May Aug Nov
2007 2007 2008 2008 2008 2008 2009 2009 2009 2009