Working Paper: CEPR ID: DP7284
Authors: Lutz Kilian; Robert J. Vigfusson
Abstract: A common view in the literature is that the effect of energy price shocks on macroeconomic aggregates is asymmetric in energy price increases and decreases. We show that widely used asymmetric vector autoregressive models of the transmission of energy price shocks are misspecified, resulting in inconsistent parameter estimates, and that the implied impulse responses have been routinely computed incorrectly. As a result, the quantitative importance of unanticipated energy price increases for the U.S. economy has been exaggerated. In response to this problem, we develop alternative regression models and methods of computing responses to energy price shocks that yield consistent estimates regardless of the degree of asymmetry. We also introduce improved tests of the null hypothesis of symmetry in the responses to energy price increases and decreases. An empirical study reveals little evidence against the null hypothesis of symmetry in the responses to energy price shocks. Our analysis also has direct implications for the theoretical literature on the transmission of energy price shocks and for the debate about policy responses to energy price shocks.
Keywords: Asymmetry; Energy Price; Impulse Response; Net Increase; Oil Price; Propagation; Shock Transmission; Vector Autoregression
JEL Codes: C32; E37; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| energy price shocks (Q43) | macroeconomic aggregates (E10) |
| traditional asymmetric VAR models (C32) | overestimate effects of energy price increases (Q47) |
| asymmetric models (C21) | inconsistent estimates (C51) |
| symmetric data generating process (C46) | biased impulse response estimates (C51) |
| new regression models (C29) | consistent estimates (C51) |
| impulse response functions from traditional models (C22) | inflated perceptions of importance of energy price increases (Q41) |
| null hypothesis of symmetry (C12) | little evidence against it (Y50) |
| asymmetric effects of energy price shocks (Q43) | established claims may be overstated (G22) |