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OIL PRICE SHOCKS AND INDUSTRIAL PRODUCTION: IS THE RELATIONSHIP LINEAR?

Published online by Cambridge University Press:  30 December 2011

Ana María Herrera ,
Latika Gupta Lagalo  and
Tatsuma Wada
Ana María Herrera*
Affiliation:
Wayne State University
Latika Gupta Lagalo
Affiliation:
Wayne State University
Tatsuma Wada
Affiliation:
Wayne State University
*
Address correspondence to: Ana María Herrera, Department of Economics, Wayne State University, 2095 Faculty Administration Building, 656 W. Kirby, Detroit, MI 48202, USA; e-mail: amherrera@wayne.edu.
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Abstract

This paper tests the three leading specifications of asymmetric and possibly nonlinear feedback from the real price of oil to U.S. industrial production and its sectoral components. We show that the evidence for such feedback is sensitive to the estimation period. Support for a nonlinear model is strongest for samples starting before 1973. Instead, using post-1973 data only, the evidence against symmetry becomes considerably weaker. For example, at the aggregate level, there is no evidence against the hypothesis of symmetric responses to oil price innovations of typical magnitude, consistent with results of Kilian and Vigfusson [Quantitative Economics, 2(3), 419–453 (2011)] for U.S. real GDP. There is strong evidence of asymmetries at the disaggregate level, however, especially for industries that are energy-intensive in production (such as chemicals) or that produce goods that are energy-intensive in use (such as transportation equipment). Our analysis suggests that these asymmetries may be obscured in the aggregate data and highlights the importance of developing multisector models of the transmission of oil price shocks.

Keywords

AsymmetryOil PriceNet IncreaseShocksIndustrial ProductionTransmission
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Supplement S3: Oil Price Shocks , November 2011 , pp. 472 - 497
Copyright
Copyright © Cambridge University Press 2011

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