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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

Abstract: 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
Date: 2010-04-13
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