Oil price disaster risk, macroeconomic dynamics and monetary policy

• Published in: International review of financial analysis 2024-11, Vol.96, p.103574, Article 103574
• Main Authors: Liu, Zongming, Shi, Wenhui
• Format: Article
• Language: English
• Subjects: Business cycle; Disaster risk; Economic dynamics; Monetary policy; Oil price volatility
• ISSN: 1057-5219
• DOI: 10.1016/j.irfa.2024.103574

Despite extensive research on the impact of oil price shocks, there is a gap in understanding the risk of oil price disaster event. This study addresses this gap by creating a quantitative measure for assessing oil price disaster risk using Bayesian methods and a specially designed Qualitative VAR model with U.S. data spanning from 1973Q1 to 2022Q2. Findings suggest that high oil price risk can lead to prolonged economic downturns and inflation. Furthermore, a DSGE model integrating oil price disaster risk is developed to explore its dynamic effects and align theoretical findings with empirical evidence. Additionally, the research delves into the economic implications of traditional and unconventional monetary policies in the presence of oil price disaster risk, highlighting key contrasts and underscoring the significance of term structure issues related to Federal Reserve guidance. The study's outcomes provide valuable insights for understanding the impact of oil price disaster risk and enhancing the effectiveness of monetary policy interventions. •Developed a novel quantitative measure for assessing oil price disaster risk using Qualitative VAR model.•Demonstrated that high oil price disaster risk can lead to prolonged economic downturns and inflation.•Introduced a DSGE model that incorporates oil price disaster risk to explore its dynamic effects.•Analyzed the economic implications of both traditional and unconventional monetary policies in the presence of oil price disaster risk.•Provided valuable insights into the term structure issues related to Federal Reserve guidance facing oil price disaster risk.