Does the Fed Respond to Oil Price Shocks?

A common view in the literature is that systematic monetary policy responses to the inflation caused by oil price shocks have been an important source of aggregate fluctuations in the US economy. Earlier empirical evidence in support of such a link was based on inappropriate econometric models. We show that there is no credible evidence that monetary policy responses to oil price shocks caused large aggregate fluctuations in the 1970s and 1980s or more recently. Our analysis suggests that the traditional monetary policy reaction framework should be replaced by models that take account of the endogeneity of the real price of oil and that allow policy responses to depend on the underlying causes of oil price shocks.