The Effect of Oil Price Uncertainty on Industrial Production in the Major European Economies - Methodologies Based on the Bayesian Approach

This paper investigates how oil price uncertainty affects industrial production (IP) in six developed European countries – Germany, UK, France, Italy, Spain and Norway. In the research process, we use several methodologies based on the Bayesian technique – MS-GARCH model and quantile regression. Estimated quantile parameters show that the magnitude of volatility transmission from oil to IP is not high in higher quantiles, but for the majority of the net oil consuming countries the negative effect is around 20% when IP is very low, which is relatively high. However, this result should be taken with a caution, because all quantile parameters are statistically significant at 70%. The results indicate that the U.K. suffers the weakest, while Spain the strongest impact from the oil price uncertainty. The reason for this finding probably lies in daily oil consumption vis-a-vis GDP, since UK has the lowest, whereas Spain has the highest oil consumption ratio. Also, it should be said that four fifth of the U.K. GDP is composed of services, which also speaks in favour why British IP suffers relatively weak impact. Besides Spain, Germany and Italy also have relatively high 0.05th quantile parameters. This indicates that these countries also endure relatively significant impact from oil price uncertainty when their economies are in recession.