Nonlinearities in the Oil Price-Output Relationship

54 Pages Posted: 18 Jan 2011

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

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Date Written: January 2011

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 Classification: Q43

Suggested Citation

Kilian, Lutz and Vigfusson, Robert John, Nonlinearities in the Oil Price-Output Relationship (January 2011). CEPR Discussion Paper No. DP8174. Available at SSRN: https://ssrn.com/abstract=1742699

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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