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The Effects of Oil Price Uncertainty on the Macroeconomy

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  • Soojin Jo
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    Abstract

    This paper investigates the effect of oil price uncertainty on real economic activity using a quarterly VAR with stochastic volatility in mean. Stochastic volatility allows oil price uncertainty to vary separately from changes in the level of oil prices, and thus the impact of oil price uncertainty can be examined in a more flexible yet tractable way. In addition, this paper substantially improves on the recovery of a historical uncertainty series by incorporating an additional uncertainty indicator, i.e., a realized volatility series from daily oil price data, into the estimation process. The estimation results show that an oil price uncertainty shock alone has negative effects on world industrial production.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2012/12/wp2012-40.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 12-40.

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    Length: 45 pages
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:bca:bocawp:12-40

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    Keywords: Business fluctuations and cycles; Econometric and statistical methods;

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    References

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    1. Gert Peersman & Christiane Baumeister, 2009. "Time-Varying Effects of Oil Supply Shocks on the US Economy," 2009 Meeting Papers 171, Society for Economic Dynamics.
    2. Christiane Baumeister & Gert Peersman, 2013. "The Role Of Time‐Varying Price Elasticities In Accounting For Volatility Changes In The Crude Oil Market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(7), pages 1087-1109, November.
    3. Ryan Kellogg, 2014. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," American Economic Review, American Economic Association, vol. 104(6), pages 1698-1734, June.
    4. Dobrislav Dobrev & Pawel Szerszen, 2010. "The information content of high-frequency data for estimating equity return models and forecasting risk," International Finance Discussion Papers 1005, Board of Governors of the Federal Reserve System (U.S.).
    5. Sangjoon Kim, Neil Shephard & Siddhartha Chib, . "Stochastic volatility: likelihood inference and comparison with ARCH models," Economics Papers W26, revised version of W, Economics Group, Nuffield College, University of Oxford.
    6. Kiseok Lee & Shawn Ni & Ronald A. Ratti, 1995. "Oil Shocks and the Macroeconomy: The Role of Price Variability," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 39-56.
    7. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen J. Terry, 2012. "Really Uncertain Business Cycles," NBER Working Papers 18245, National Bureau of Economic Research, Inc.
    8. John Elder & Apostolos Serletis, 2010. "Oil Price Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1137-1159, 09.
    9. Kilian, Lutz & Murphy, Dan, 2010. "The Role of Inventories and Speculative Trading in the Global Market for Crude Oil," CEPR Discussion Papers 7753, C.E.P.R. Discussion Papers.
    10. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
    11. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers 5994, C.E.P.R. Discussion Papers.
    12. James D. Hamilton, 2011. "Historical Oil Shocks," NBER Working Papers 16790, National Bureau of Economic Research, Inc.
    13. Xin Huang & George Tauchen, 2005. "The Relative Contribution of Jumps to Total Price Variance," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(4), pages 456-499.
    14. Don Bredin & John Elder & Stilianos Fountas, 2010. "Oil Volatility and the Option Value of Waiting: An analysis of the G-7," Discussion Paper Series 2010_05, Department of Economics, University of Macedonia, revised Apr 2010.
    15. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-44, June.
    16. Bernanke, Ben S, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 85-106, February.
    17. Dobrislav P. Dobrev & Pawel J. Szerszen, 2010. "The information content of high-frequency data for estimating equity return models and forecasting risk," Finance and Economics Discussion Series 2010-45, Board of Governors of the Federal Reserve System (U.S.).
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