The effect of oil price shocks on economic activity: a local projections approach
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The effect of oil price shocks on economic activity: a local projections approach Mirko Abbritti 1 & Juan Equiza-Goñi 2 & Fernando Perez de Gracia 2 & Tommaso Trani 2 # Academy of Economics and Finance 2020
Abstract We examine the impact of oil price shocks on four U.S. macroeconomic variables over the period January 1974 to August 2016. We use local projections and consider different linear and nonlinear model specifications. The results suggest that oil price shocks have a large and significant effect not only on production, interest rates and unemployment, but also on credit spreads. The magnitude of these effects depends on the level of the oil price before the occurrence of the shock. Keywords Oil price shocks . Linear and nonlinear specifications . Local projections .
Economic activity JEL classification E32 . Q43
1 Introduction Oil price shocks have received considerable attention in the economic and financial literature for their impact on macroeconomic and financial variables.1 Kilian (2009), Baumeister et al. (2010) and Kang and Ratti (2013), for instance, study the effect of oil shocks on real GDP growth and inflation distinguishing between supply or demand shocks. Other papers have explored the presence of non-linear effects; see, for example, Hamilton (2011), Herrera et al. (2011) or Kilian and Vigfusson (2011). Although most of these papers focus on the U.S., there are many studies that analyze the 1
See, for example, the initial papers in the 1980s by Rasche and Tatom (1981), Bruno and Sachs (1982), and the influential study by Hamilton (1983). For recent reviews of the literature, see Herrera et al. (2019) or Kilian and Zhou (2020). Electronic supplementary material The online version of this article (https://doi.org/10.1007/s12197-02009512-w) contains supplementary material, which is available to authorized users.
* Fernando Perez de Gracia [email protected] Extended author information available on the last page of the article
Journal of Economics and Finance
macroeconomic impact of oil shocks in other countries. Examples in this case are Cunado and Perez de Gracia (2003, 2005), Cunado et al. (2015) and Herrera et al. (2015). Nonetheless, this question still raises a lot of policy interest and research discussion as shown by Baumeister and Kilian (2016) or Baumeister and Hamilton (2019). This paper examines the impact of oil price shocks on four macroeconomic variables of the U.S. from January 1974 to August 2016 using local projections (LPs). We contribute by showing how responses of relevant macroeconomic variables (production, real interest rate, unemployment rate, and credit spreads) differ depending on the level of oil prices (already high, normal, or already low). In particular, four are the main contributions of the paper. First, our empirical strategy is based on the LPs approach initially proposed by Jordà (2005) rather than the vector autoregressions (VARs) used by previous literature. Contrary to VARs, LPs do not require the specification and estimation of the unknown data generati
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