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Asymmetries in the response of economic activity to oil price increases and decreases?

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  • Herrera, Ana María
  • Lagalo, Latika Gupta
  • Wada, Tatsuma

Abstract

It has been common to assume that the relationship between economic activity and oil prices is asymmetric. Theoretical underpinnings for this asymmetry include costly sectoral reallocation, partial equilibrium models of irreversible investment, and some version of precautionary savings. Yet, recent studies that use new methodologies to test for asymmetries in U.S. data have cast some doubts on that premise. In this paper, we use state-of-the-art techniques to evaluate the presence of asymmetries for a set of OECD countries containing both oil exporters and oil importers. We find very little support for the hypothesis that the response of industrial production to oil price increases and decreases is asymmetric. Our results have important implications for theoretical models of the transmission of oil price shocks: they point towards the importance of direct-supply and direct-demand transmission channels, as well as indirect transmission channels that imply a symmetric response.

Suggested Citation

  • Herrera, Ana María & Lagalo, Latika Gupta & Wada, Tatsuma, 2015. "Asymmetries in the response of economic activity to oil price increases and decreases?," Journal of International Money and Finance, Elsevier, vol. 50(C), pages 108-133.
    • Handle: RePEc:eee:jimfin:v:50:y:2015:i:c:p:108-133
    DOI: 10.1016/j.jimonfin.2014.09.004
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