Monetary policy and the transmission of oil shocks

This paper provides evidence on the role played by monetary policy in the transmission of oil shocks to the US economy. We show that for the period since 1986, oil shocks have had a negative effect on stock returns, regardless of whether the oil shock is defined as the percentage change in the price of oil or a nonlinear transformation of that series. We then demonstrate that there is no relationship between the reaction of individual stock prices to oil shocks and to monetary policy shocks. This implies that oil shocks do have effects on the economy beyond their effect on monetary policy. We conclude that systematic monetary policy is not as effective as suggested in some previous studies.