Oil shocks and the US terms of trade: gauging the role of the trade channel

Alessandro Maravalle

Applied Economics Letters, 2013, vol. 20, issue 2, 152-156

Abstract: Recent theoretical literature claims that demand-driven transmission mechanisms are the key to understand how oil shocks affect the economy. Following this literature, we measure the economic strength of one of these demand-driven channels, the trade channel, in the transmission of oil shocks to the US economy. We use Kilian's (2009) decomposition of oil price shocks to identify three possible sources of oil shocks: oil supply, oil-market specific demand and global demand shocks. We then estimate the impact of each shock on the US terms of trade controlling for nonlinear effects in the sign and the size of the shocks. All oil shocks have persistent and statistically significant effects on the US terms of trade. However, we find that only oil supply shocks have an impact on the terms of trade that is nonlinear in the size of the shock. This last result is in accordance with the theoretical findings in Maravalle (forthcoming).

Date: 2013
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DOI: 10.1080/13504851.2012.684779

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