Capital investment may also be affected if the oil price shock encourages producers to substitute less-energy-intensive capital for more-energy-intensive capital. Of course, such a substitution will not necessarily lower aggregate demand if it requires more investment demand for new energy-saving equipment. Oil is a pervasive commodity, and other types of non-model effects are possible, but these consumption and investment effects seem the most obvious.
How should monetary policy respond to oil price shocks? Monetary policy makers in this country have a dual mandate, to stabilize prices and to maximize sustainable employment in the long run. Their response to oil price increases should focus on these two objectives.