OIL PRICE SHOCKS, INVENTORIES, AND MACROECONOMIC DYNAMICS

Ana María Herrera

Macroeconomic Dynamics, 2018, vol. 22, issue 3, 620-639

Abstract: This paper investigates the time delay in the transmission of oil price shocks using disaggregated manufacturing data on inventories and sales. VAR estimates indicate that industry-level inventories and sales respond faster to an oil price shock than aggregate gross domestic product, especially in industries that are energy-intensive. In response to an unexpected oil price increase, sales drop and inventories are accumulated. This leads to future reductions in production. We estimate a modified linear–quadratic inventory model to inquire whether the patterns observed in the VAR impulse responses are consistent with rational behavior by the firms. Estimation results suggest that three mechanisms play a role in the industry-level dynamics. First, oil prices act as a negative demand shock. Second, the shock catches manufacturers by surprise, resulting in higher-than-anticipated inventories. Third, because of their desire to smooth production, manufacturers deviate from the target level of inventories and spread the decline in production over various quarters; hence the delay in the response of aggregate output.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:22:y:2018:i:03:p:620-639_00

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