Abstract
This thesis analyzes the effect of foreign and domestic oil demand and supply shocks, global economic activity shocks, and monetary policy shocks on U.S. macroeconomic aggregates. A factor augmented vector autoregressive (FAVAR) model is used to maximize the amount of information incorporated to help minimize the “curse of dimensionality” problem associated with traditional vector autoregressive models. Data from FRED, BLS, USCB, EIA, BEA, BGFRS, OECD, McCracken, and Kilian were used to analyze the effects of foreign and domestic oil demand and supply shocks in addition to monetary policy shocks on the U.S. economy. My results for the effects of foreign oil supply, global aggregate demand, foreign oil demand, and monetary policy shocks on the U.S. economy are mostly consistent with previous research. However, my research shows that crude oil related shocks affect individual U.S. industries differently as expected. Positive global aggregate demand and foreign oil demand shocks have positive effects on the U.S. mining industry and negative effects on other U.S. industries. In addition, my research contributes to the literature by separating and identifying foreign and domestic crude oil demand and supply shocks. I including domestic oil production and domestic crude oil refinery inputs since they determine U.S. sensitivity to import oil prices and find that these variables significantly affect the U.S. economy.