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Economic Quarterly

Summer 2005

Oil Prices and Consumer Spending

Yash P. Mehra and Jon D. Petersen

Richmond Fed Economist Yash P. Mehra and Research Associate Jon D. Petersen present evidence of a nonlinear relation between oil price changes and consumer spending. They assert that oil price increases have a negative effect on spending whereas oil price declines have no effect: The estimated negative effect of an oil price increase on spending is larger if one focuses on oil price increases occurring after a period of stable oil prices (net oil price increases) or if spending includes durables, the latter suggesting the possible negative influence of energy prices on the purchase of big-ticket consumption goods. Furthermore, the estimated oil price coefficients in the consumption equation do not show parameter instability during the 1980s when oil prices moved widely for the first time in both directions.

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