The idea that when oil prices increase, they correspondingly drain discretionary consumer income is widely presumed. This is leading to a decreased expenditure in the economy and potentially paving the way for recessions. Nonetheless, Baumeister, Kilian and Zhou [1] argue against the conventional wisdom, terming it as a hoax.
In their work, Baumeister, Kilian, and Zhou [1] employ quantitative methods, specifically regression models, to test their hypotheses. However, the consistency and accuracy of the models used invite critical inspection. Inconsistencies within models may drive unexpected conclusions or mask particular relationships.
Baumeister, Kilian, and Zhou’s [1] paper has sparked a lively intellectual conversation within the academic community. For those agreeing, it is based on the belief that numerous other factors can impact discretionary spending more significantly than oil price changes. In the opposing camp, scholars argue that studiously ignoring the real-world increases in oil prices, which are often substantial, is a methodological misstep.
Baumeister, Kilian, and Zhou's arguments [1] pose a significant reexamination of the oil-economy relationship. The implications of their arguments stretch from the recalibration of theoretical economic models to practical ramifications concerning policy measures.
Baumeister, Kilian, and Zhou's [1] research creates a path for future exploration on how other variables might impact discretionary income more significantly than oil price changes, which can be looked at in future research.
This article presents a thorough examination of Baumeister, Kilian, and Zhou's paper, looking into its methodologies, debates it sparked, implications, and future directions. As is the nature of academic scholarship, the discussions, implications, and outcomes will likely continue to evolve.
Baumeister, C., Kilian, L. and Zhou, X., 2018. Is the discretionary income effect of oil price shocks a hoax?. The Energy Journal, 39(2_suppl), pp.117-137.
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