Asymmetries in the response of economic activity to oil price increases and decreases?

Ana María Herrera, Latika Gupta Lagalo, Tatsuma Wada

Research output: Contribution to journalArticlepeer-review

55 Citations (Scopus)

Abstract

It has been common to assume that the relationship between economic activity and oil prices is asymmetric. Theoretical underpinnings for this asymmetry include costly sectoral reallocation, partial equilibrium models of irreversible investment, and some version of precautionary savings. Yet, recent studies that use new methodologies to test for asymmetries in U.S. data have cast some doubts on that premise. In this paper, we use state-of-the-art techniques to evaluate the presence of asymmetries for a set of OECD countries containing both oil exporters and oil importers. We find very little support for the hypothesis that the response of industrial production to oil price increases and decreases is asymmetric. Our results have important implications for theoretical models of the transmission of oil price shocks: they point towards the importance of direct-supply and direct-demand transmission channels, as well as indirect transmission channels that imply a symmetric response.

Original languageEnglish
Pages (from-to)108-133
Number of pages26
JournalJournal of International Money and Finance
Volume50
DOIs
Publication statusPublished - 2015 Feb 1
Externally publishedYes

Keywords

  • Asymmetry
  • Industrial production
  • International transmission
  • Net increase
  • Oil price
  • Shocks

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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