Oil Shock Model

The Oil Shock Model explains how sudden increases or decreases in oil prices can significantly impact the economy. When oil prices rise sharply, costs for companies and consumers increase, leading to inflation and reduced economic growth. Conversely, a sudden drop in oil prices can boost economic activity by lowering energy costs, but may also harm oil-producing countries' economies. These shocks can cause volatility in markets, influence inflation rates, and affect employment and overall economic stability. The model helps policymakers understand and anticipate the ripple effects of unpredictable oil price changes on the broader economy.