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THE ASYMMETRIC EFFECTS OF OIL PRICE SHOCKS

Published online by Cambridge University Press:  08 December 2011

Sajjadur Rahman  and
Apostolos Serletis
Sajjadur Rahman
Affiliation:
University of Saskatchewan
Apostolos Serletis*
Affiliation:
University of Calgary
*
Address correspondence to: Apostolos Serletis, Department of Economics, University of Calgary, Calgary, Alberta T2N 1N4, Canada; e-mail: [email protected]; URL: http://econ.ucalgary.ca/serletis.htm.
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Abstract

In this paper we investigate the effects of oil price uncertainty and its asymmetry on real economic activity in the United States, in the context of a bivariate vector autoregression with GARCH-in-mean errors. The model allows for the possibilities of spillovers and asymmetries in the variance–covariance structure for real output growth and the change in the real price of oil. Our measure of oil price uncertainty is the conditional variance of the oil price–change forecast error. We isolate the effects of volatility in the change in the price of oil and its asymmetry on output growth and employ simulation methods to calculate generalized impulse response functions and volatility impulse response functions to trace the effects of independent shocks on the conditional means and the conditional variances, respectively, of the variables. We find that oil price uncertainty has a negative effect on output, and that shocks to the price of oil and its uncertainty have asymmetric effects on output.

Keywords

Crude OilVolatilityVector AutoregressionMultivariate GARCH-in-Mean VAR
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Supplement S3: Oil Price Shocks , November 2011 , pp. 437 - 471
Copyright
Copyright © Cambridge University Press 2011

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