The feedback from oil prices to economic activity is captured by a reduced-form production function that allows us to separately specify shocks to the output gap (transitory shocks to output), shocks to potential output (permanent shocks to the level of output), and shocks to potential output growth (permanent shocks to the growth rate of output). The richness of this specification helps us to model the complicated interactions of oil price movements and GDP, where both trend and gap decline if oil prices increase. However, there is not enough variation in the historical data to provide well-determined estimates of these separate effects based on a single observed variable
