It was observed that following a one standard deviation shock to the price of oil, interest rates rose sharply immediately afterwards reaching a maximum after two quarters. Then from this maximum point, interest rates decline steadily for the next 14 periods until the minimum point, approximately 0.5 lower than the original trend. It appears that at the point where GDP had reverted back to its original pattern, interest rates respond and start to rise. However, during the whole five year estimation, they do not revert back to their original trend. This was also the case for unemployment and exchange rates. Both variables displayed a negative response throughout the long term and did not normalise during the five year analysis.
These results reveal a great deal about the relationship between oil prices and the economy in the UK.In summary, this paper shows that there is a significant negative relationship between oil prices and economic. When oil prices increase, it is clear that it has a significant negative impact on the economy. The impact is greater than that found by Jiménez-Rodríguez, R. And Sánchez, M. (2004). The reason for this could be that during the sample period analysed in this paper, the UK became a net importer of oil, whereas in their paper, the UK was still a net exporter. The UK is faced with periods of higher inflation than normal in the immediate aftermath. Furthermore the growth rate declines by up to 2% for an extended period. The results seem to follow the theory of business cycles, which refers to economic fluctuations from periods of boom to recession typically within a three to five year period.