Impact of Falling Oil Prices on US Economic Conditions in Both the Short Run and Medium Run

Aye Mya Thant Zin


My thesis examines how falling oil prices impact the US economy. I use Blanchard's theoretical IS-LM-PC model. The model views oil prices as transmitting their impact by altering the degree of monopoly power. The macroeconomic variables considered are the markup, GDP, the unemployment rate, the interest rate, the expected change in inflation and the real wage. My procedures include developing a scenario of an oil price shock, using the model to identify the behavioural reactions of the macro variables and finally comparing the predicted theoretical behaviors with empirical trends.

My research found some results were consistent while some were partially consistent, however some were totally inconsistent with the model of Blanchard. The equilibrium conditions we had expected for the actual and natural GDP were not observed in the initial quarter. The expected change in inflation was consistent with both the short and the medium run. The unemployment rate was totally inconsistent with the model. The interest rate and the real wage were partially consistent with what we expected. The real interest rate as expected did not change significantly but dropped eventually. However, the natural rate of interest unexpectedly decreased at the beginning but increased later.