Do Oil Prices Help Forecast U.S. Real GDP? The Role of Nonlinearities and Asymmetries

Posted: 27 Sep 2012

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

Date Written: May 2012

Abstract

There is a long tradition of using oil prices to forecast U.S. real GDP. It has been suggested that the predictive relationship between the price of oil and one-quarter ahead U.S. real GDP is nonlinear in that (1) oil price increases matter only to the extent that they exceed the maximum oil price in recent years and that (2) oil price decreases do not matter at all. We examine, first, whether the evidence of in-sample predictability in support of this view extends to out-of-sample forecasts. Second, we discuss how to extend this forecasting approach to higher horizons. Third, we compare the resulting class of nonlinear models to alternative economically plausible nonlinear specifications and examine which aspect of the model is most useful for forecasting. We show that the asymmetry embodied in commonly used nonlinear transformations of the price of oil is not helpful for out-of-sample forecasting; more robust and more accurate real GDP forecasts are obtained from symmetric nonlinear models based on the three-year net oil price change. Finally, we quantify the extent to which the 2008 recession could have been forecast using the latter class of time-varying threshold models.

Keywords: Out-of-sample forecast, Oil price, Real GDP, Nonlinearity, Asymmetry

JEL Classification: C32, C53, Q43

Suggested Citation

Kilian, Lutz and Vigfusson, Robert John, Do Oil Prices Help Forecast U.S. Real GDP? The Role of Nonlinearities and Asymmetries (May 2012). FRB International Finance Discussion Paper No. 1050. Available at SSRN: https://ssrn.com/abstract=2153094

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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