Third, the historical decompositions indicate that the importance of U.S. energy efficiency and U.S. oil supply shocks varies over time. In particular, the positive effects of improvements in U.S. energy efficiency on global economic activity are most prominent during the early 1980s. This period followed the 1970s oil crisis and featured the 1980 Energy Security Act, the purpose of which was to spur innovation in energy efficiency and renewable energy technologies. The positive effects of U.S. oil supply shocks are limited to the post-2010 period when the U.S. shale revolution resulted in a surge in domestic oil production. More precisely, the overall productivity gains in the U.S. shale sector increased global GDP by approximately 2 percent over the period 2010–2019. The effects are most pronounced starting in 2014—a period when exemptions were heavily used to circumvent the U.S. crude oil export ban, which contributed to a decline in global oil prices. Focusing exclusively on the 2010–2019 period, I find that a series of predominantly negative U.S. energy efficiency shocks had an adverse impact on global economic activity; in the absence of these shocks, global GDP would have been higher by about 1.3 percent over this period. The results are most prominent during the period 2017–2019, which overlaps with the second shale boom. In particular, the positive impact of the second shale boom on global GDP during the period 2017–2019 is eclipsed by the effect of negative U.S. energy efficiency shocks.

I then demonstrate that a multi-country international business cycle model that incorporates a global oil market is capable of explaining most of the empirical results. The model builds on Backus & Crucini (2000) and is similar to Bodenstein & Guerrieri (2011) and Gars & Olovsson (2017). The key difference is that, in order to capture U.S. oil supply shocks and U.S. energy efficiency shocks, I model the United States as an economy that produces oil and either exports or imports it. Specifically, the model includes three countries: a net oil importer, a net oil exporter, and the United States. Intermediate-good producing firms in each oil-importing country choose capital, labor, and oil (as an energy source) to produce a distinct tradable intermediate good, where firms’ demand for oil is affected by energy efficiency shocks. The intermediate good is traded across countries to produce a final good, which is used for consumption and investment. Additionally, the model features oil supply shocks. The U.S. oil sector uses labor as an input to produce oil, which is affected by unexpected changes in productivity, while the net oil exporting country is endowed with a stochastic supply of oil that is affected by exogenous shocks. The U.S. energy efficiency and oil supply shocks are modeled as persistent but transitory processes and they are estimated using an indirect inference approach. The indirect inference method estimates these parameters by matching empirical impulse responses obtained from the FAVAR with impulse responses from an identical FAVAR estimated on data simulated from the theoretical model. The model abstracts from a number of features such as nominal frictions, the strategic behavior of oil producers, longrun growth, and different types of crude oil to focus on features that serve to demonstrate the main mechanisms underlying the empirical results.

My model-simulated impulse responses closely match the empirical impulse responses and provide a framework for interpreting the empirical findings. In particular, the results provide an interpretation for the mechanisms by which changes in U.S. oil production and consumption affect the global oil market and GDP across countries. A key parameter restriction that generates a larger 5