Does Oil Price Uncertainty Affect Economic Activity?

Abstract:     
The change in investment and output in response to changing energy prices depends on whether energy prices increase or decrease. In the literature, this asymmetry is attributed to irreversibility of investment and uncertainty with respect to energy prices. The empirical literature does not explicitly take uncertainty into account. In this paper we measure oil price uncertainty as the time-varying conditional standard deviations from univariate GARCH models using high-frequency data and estimate the effect of uncertainty. On average, the effects of uncertainty on energy use and energy intensity are larger if energy prices drop.

Number of Pages in PDF File: 50

Keywords: Volatility, Uncertainty, GARCH, Oil prices

JEL Classification: C22, Q43

working papers series