Working Paper: CEPR ID: DP8174
Authors: Lutz Kilian; Robert J. Vigfusson
Abstract: It is customary to suggest that the asymmetry in the transmission of oil price shocks to real output is well established. Much of the empirical work cited as being in support of asymmetries, however, has not directly tested the hypothesis of an asymmetric transmission of oil price innovations. Moreover, many of the papers quantifying these asymmetric responses are based on censored oil price VAR models which recently have been shown to be invalid. Other studies are based on dynamic correlations in the data that do not shed light on the central question of whether the structural responses of real output triggered by positive and negative oil price innovations are asymmetric. Recently, a number of new methodologies have been introduced and applied to the problem of testing and quantifying asymmetric responses of U.S. real economic activity to positive and negative oil price innovations. Our objective is to put this literature in perspective, to contrast it with more traditional approaches, to highlight directions for further research, and to reconcile some seemingly conflicting results reported in the literature.
Keywords: Asymmetry; Nonlinearity; Oil Price; Real Output; Uncertainty
JEL Codes: Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unexpected increases in oil prices (Q31) | larger economic contractions (F44) |
| unexpected decreases in oil prices (Q31) | smaller economic expansions (F69) |
| oil price shocks (Q43) | asymmetric responses of real output (E23) |
| Federal Reserve's response to oil price shocks (E52) | asymmetry in responses (C21) |
| larger oil price shocks (Q43) | different response dynamics (C69) |
| linear models for smaller shocks (C51) | insufficient for larger fluctuations in oil prices (Q31) |
| nonlinearity in tests (C52) | does not support theoretical foundations of reallocation and uncertainty effects (D81) |