Pitfalls in Estimating Asymmetric Effects of Energy Price Shocks

57 Pages Posted: 15 Jul 2009

See all articles by Lutz Kilian

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Robert J. Vigfusson

Federal Reserve Board - Trade and Quantitative Studies

Multiple version iconThere are 2 versions of this paper

Date Written: April 2009

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 Classification: C32, E37, Q43

Suggested Citation

Kilian, Lutz and Vigfusson, Robert John, Pitfalls in Estimating Asymmetric Effects of Energy Price Shocks (April 2009). CEPR Discussion Paper No. DP7284. Available at SSRN: https://ssrn.com/abstract=1433861

Lutz Kilian (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Robert John Vigfusson

Federal Reserve Board - Trade and Quantitative Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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