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The Response of Business Fixed Investment to Changes in Energy Prices: A Test of Some Hypotheses About the Transmission of Energy Price Shocks

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  • Edelstein, Paul
  • Kilian, Lutz

Abstract

Changes in firms’ investment expenditures are considered one of the primary channels through which energy price shocks are transmitted to the economy. It is widely believed that the response of business fixed investment to energy price increases differs from its response to energy price decreases. We show that the apparent asymmetry in the estimated responses of business fixed investment in equipment and structures cannot be reconciled with standard theoretical explanations of asymmetric responses. Rather this evidence is an artifact (1) of the aggregation of mining-related expenditures by the oil, natural gas, and coal mining industry and all other expenditures, and (2) of ignoring an exogenous shift in investment caused by the 1986 Tax Reform Act. After controlling for these factors, formal statistical tests are unable to reject the assumption of symmetric responses to energy price shocks for all components of investment in structures. For nonresidential equipment there is weak statistical evidence of classical asymmetries in some components, but not in the aggregate. Once symmetry is imposed and mining-related expenditures are excluded, the estimated response of business fixed investment in equipment and structures tends to be small and mostly statistically insignificant. Historical decompositions show that energy price shocks have played a minor role in driving fluctuations in nonresidential fixed investment other than investment in mining. Our conclusions are largely robust to defining energy price shocks in terms of percent changes, large percent changes or net percent changes of energy prices; they are also robust to using alternative measures of energy prices and to weighting energy prices by the energy share in value added.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6507.

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Date of creation: Oct 2007
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Handle: RePEc:cpr:ceprdp:6507

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Keywords: 1986 Tax Reform Act; Asymmetric responses; Equipment; Nonresidential fixed investment; Oil price shocks; Structures;

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References

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  1. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
  2. 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.
  3. Davis, Steven J. & Haltiwanger, John, 2001. "Sectoral job creation and destruction responses to oil price changes," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 465-512, December.
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  6. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October.
  7. Edelstein, Paul & Kilian, Lutz, 2007. "Retail Energy Prices and Consumer Expenditures," CEPR Discussion Papers 6255, C.E.P.R. Discussion Papers.
  8. Hamilton, James D, 1988. "A Neoclassical Model of Unemployment and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 593-617, June.
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  10. Mark E. Doms & Timothy Dunne, 1998. "Capital Adjustment Patterns in Manufacturing Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 409-429, April.
  11. Hooker, Mark A., 1996. "This is what happened to the oil price-macroeconomy relationship: Reply," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 221-222, October.
  12. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
  13. Hooker, Mark A, 2002. "Are Oil Shocks Inflationary? Asymmetric and Nonlinear Specifications versus Changes in Regime," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 540-61, May.
  14. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
  15. Lee, Kiseok & Ni, Shawn, 2002. "On the dynamic effects of oil price shocks: a study using industry level data," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 823-852, May.
  16. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October.
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