The Asymmetric Effects of Oil Price Shocks

Abstract

In this paper we investigate the effects of oil price uncertainty and its asymmetry on real economic activity in the United States, in the context of a general bivariate framework in which a vector autoregression is modified to accommodate GARCH-inMean errors, as detailed in Engle and Kroner (1995), Grier et al. (2004), andShields et al. (2005). The model allows for the possibilities of spillovers and asymmetries in the variance-covariance structure for real output growth and the change in the real price of oil. Our measure of oil price uncertainty is the conditional variance of the oil price change forecast error. We isolate the effects of volatility in the change in the price of oil and its asymmetry on output growth and, following Koop et al. (1996), Hafner andHerwartz (2006), andvan Dijk et al. (2007), we employ simulation methods to calculate Generalized Impulse Response Functions (GIRFs) and Volatility Impulse Response Functions (VIRFs) to trace the effects of independent shocks on the conditional means and the conditional variances, respectively, of the variables.JEL classification: E32, C32.

Dynamic spillovers of oil price shocks and economic policy uncertainty

“…On one hand, higher oil prices exert negative impacts on the economy, such as lower productivity and/or higher inflation (see, inter alia, Filis and Chatziantoniou, 2013;Montoro, 2012;Natal, 2012;Rahman and Serletis, 2011;Balke et al, 2010;Elder and Serletis, 2010;Tang et al, 2010;Du et al, 2010;Filis, 2010;Cologni and Manera, 2008;Cunado and Pérez de Gracia, 2005;Peter Ferderer, 1997;Hamilton, 1983). Such economic conditions put pressure on policy makers to mitigate the negative effects of increased oil prices, which in turn, raises concerns regarding the success of these policies.…”

“…More specifically, past evidence suggest that there are significant effects of oil prices on industrial production and inflation (see, inter alia, Filis and Chatziantoniou, 2013;Balke et al, 2010;Tang et al, 2010;Du et al, 2010;Filis, 2010;Peter Ferderer, 1997). Furthermore, authors such as, Rahman and Serletis (2011), Elder and Serletis (2010), Cologni and Manera (2008), Cunado and Pérez de Gracia (2005), Lee et al (1995) and Hamilton (1983) confirm that the US economic activity has been significantly affected by rises in oil prices, as well as, by the uncertainty about future oil price changes. Along a similar vein, Montoro (2012) and Natal (2012) also establish the link between increased inflation and low production output given an oil price increase.…”

Oil price uncertainty and the business cycle: Accounting for the influences of global supply and demand within a VAR GARCH-in-mean framework

“…Previous studies, like Elder and Serletis (2010) or Rahman and Serletis (2011), attribute this to the rapidness of the price reduction. Their argument is that this unexpected shock led to a strong increase of oil price uncertainty, which, in turn, hampered economic output.…”

“…The calculations are conducted with version 9.00 of the WinRATS software package distributed by Estima. 11 As previous studies like Elder and Serletis (2010), Rahman and Serletis (2011), and Pinno and Serletis (2013) have already noted, the estimation of multivariate VAR GARCH-in-mean models involves a considerable number of complex calculations and is prone to computational difficulties. We have to acknowledge that, in this regard, our framework constitutes no exception.…”

Engine of Growth?: The Caribbean Private Sector Needs More Than an Oil Change

“…While the negative effects of higher and more volatile energy prices have been well documented (Kilian 2008), it is important to note that the effect of price shocks has also been shown to be asymmetric (Rahman and Serletis 2011). For example, Rahman and Serletis show that shocks to the price of oil and price uncertainty have asymmetric effects on output, but also that overall uncertainty about oil prices has a negative effect on output.…”