The Effects of Uncertainty about Oil Prices in G-7
Don Bredin (),
John Elder () and
Stilianos Fountas ()
No 200840, Working Papers from Geary Institute, University College Dublin
The failure of decreases in oil prices to produce expansions that mirror the contractions associated with higher oil prices has been a topic of considerable interest. We investigate for the G-7 one explanation for this feature - the role of uncertainty about oil prices. In particular, we examine the link between oil price uncertainty and industrial production utilizing a very general and °exible empirical methodology that is based on a structural VAR modi¯ed to accommodate multivariate GARCH in mean. Our primary result is that oil price uncertainty has had a negative and signi¯cant e®ect on industrial production in four of the G-7 countries - Canada, France, UK and US. Impulse-response analysis suggests that, in the short-run, both positive and negative oil shocks may be contractionary. Our result helps explain why the sudden collapse in oil prices in the mid-1980's failed to produce rapid expansion in the G-7, and why the steady increases in oil prices from 2003-2007 did not induce recessions.
Keywords: Oil; Volatility; Vector autoregression; Multivariate GARCH-in-Mean VAR. (search for similar items in EconPapers)
JEL-codes: E32 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-ene and nep-mac
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