Macroeconomic uncertainty and the impact of oil shocks

Ine Van Robays

No 1479, Working Paper Series from European Central Bank

Abstract: This paper evaluates whether macroeconomic uncertainty changes the impact of oil shocks on the oil price. Using a structural threshold VAR model, we endogenously identify different regimes of uncertainty in which we estimate the effects of oil demand and supply shocks. The results show that higher macroeconomic uncertainty, as measured by higher world industrial production volatility, significantly increases the responsiveness of oil prices to oil shocks. This implies a lower price elasticity of oil demand and supply in the uncertain regime, or in other words, that both oil curves become steeper when uncertainty is high. The difference in oil demand elasticities is both statistically and economically meaningful. Accordingly, varying uncertainty about the macroeconomy can explain time variation in the oil price elasticity and hence in oil price volatility. Also the impact of oil shocks on economic activity appears to be significantly stronger in uncertain times. JEL Classification: E31, E32, Q41, Q43

Keywords: oil prices; price elasticity; sign restrictions; threshold VAR; uncertainty (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-cwa, nep-ene and nep-mac
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Citations: View citations in EconPapers (18)

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Related works:
Working Paper: Macroeconomic Uncertainty and the Impact of Oil Shocks (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20121479

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