The Response of Business Fixed Investment to Changes in Energy Prices: A Test of Some Hypotheses About the Transmission of Ener

Lutz Kilian and Paul Edelstein

No 6507, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Changes in firms? investment expenditures are considered one of the primary channels through which energy price shocks are transmitted to the economy. It is widely believed that the response of business fixed investment to energy price increases differs from its response to energy price decreases. We show that the apparent asymmetry in the estimated responses of business fixed investment in equipment and structures cannot be reconciled with standard theoretical explanations of asymmetric responses. Rather this evidence is an artifact (1) of the aggregation of mining-related expenditures by the oil, natural gas, and coal mining industry and all other expenditures, and (2) of ignoring an exogenous shift in investment caused by the 1986 Tax Reform Act. After controlling for these factors, formal statistical tests are unable to reject the assumption of symmetric responses to energy price shocks for all components of investment in structures. For nonresidential equipment there is weak statistical evidence of classical asymmetries in some components, but not in the aggregate. Once symmetry is imposed and mining-related expenditures are excluded, the estimated response of business fixed investment in equipment and structures tends to be small and mostly statistically insignificant. Historical decompositions show that energy price shocks have played a minor role in driving fluctuations in nonresidential fixed investment other than investment in mining. Our conclusions are largely robust to defining energy price shocks in terms of percent changes, large percent changes or net percent changes of energy prices; they are also robust to using alternative measures of energy prices and to weighting energy prices by the energy share in value added.

Keywords: 1986 tax reform act; Asymmetric responses; Equipment; Nonresidential fixed investment; Oil price shocks; Structures (search for similar items in EconPapers)
JEL-codes: E22 E32 Q43 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-bec, nep-ene and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (145)

Downloads: (external link)
https://cepr.org/publications/DP6507 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:6507

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP6507

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().