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Oil Price Shock: A Nonlinear Approach

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  • Rebeca Jiménez-Rodríguez

    (Universidad de Alicante)

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    Abstract

    Nowadays, the importance of crude oil goes beyond simple economic aspects and affects social life in general. As such, it is imperative that we should know what the relationship between GDP growth and oil price changes is like. This paper presents evidence of a nonlinear relationship between the two things. We also argue that this non-linearity is not merely due to the use of data from the mid-1980s onwards, as most authors, so far, seem to believe. In fact, we find the existence of non-linearity with the use of data earlier than 1984, and even before 1977. Furthermore, we question that the nonlinear transformations of oil prices proposed in the Literature are able to reflect such non-linearity. We therefore use a non-linear function that relates GDP growth to oil prices, and estimate this function by means of kernel methods, avoiding any assumptions about its form. This kernel estimation improves on the linear estimation, and also improves on both Hamilton?s (2001b) estimation and those of the nonlinear transformations. Hoy día la importancia del petróleo sobrepasa los aspectos meramenteeconómicos, afectando de manera generalizada a nuestra vida social. Por ello, es muyimportante saber cuál es la relación existente entre el crecimiento del PIB y los cambiosen el precio del petróleo. Este artículo presenta evidencia de la existencia de unarelación no-lineal entre ambos. Esta no-linealidad se debe no solamente al uso de datosdesde mitad de los años ochenta, como la mayoría de los autores parecen creer. Dehecho, se puede encontrar la existencia de no-linealidad con el uso de datos anteriores a1984, e incluso anteriores a 1977. Este artículo adicionalmente cuestiona que lastransformaciones no-lineales propuestas en la literatura sean capaces de capturar dichano-linealidad. Por todo ello, se utiliza una función no-lineal que relaciona el crecimientodel PIB con el precio del petróleo, estimándola a través de métodos ¿kernel¿, evitandoasí cualquier supuesto sobre su forma. Esta estimación ¿kernel¿ mejora la estimaciónlineal, así como aquellas derivadas de las transformaciones no-lineales y aquellapropuesta por Hamilton (2001b).

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    File URL: http://www.ivie.es/downloads/docs/wpasec/wpasec-2002-32.pdf
    File Function: Fisrt version / Primera version, 2002
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    Bibliographic Info

    Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie EC with number 2002-32.

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    Length: 60 pages
    Date of creation: Dec 2002
    Date of revision:
    Publication status: Published by Ivie
    Handle: RePEc:ivi:wpasec:2002-32

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    Keywords: Fluctuaciones macroeconómicas; shock del precio del petróleo. Macroeconomic fluctuations; Oil price shock.;

    References

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    1. Lee, Tae-Hwy & White, Halbert & Granger, Clive W. J., 1993. "Testing for neglected nonlinearity in time series models : A comparison of neural network methods and alternative tests," Journal of Econometrics, Elsevier, vol. 56(3), pages 269-290, April.
    2. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," NBER Working Papers 2589, National Bureau of Economic Research, Inc.
    3. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
    4. 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.
    5. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
    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. John Burbidge & Alan Harrison, 1982. "Testing for the Effects of Oil-Price Rises Using Vector Autoregressions," School of Economics Working Papers 1982-01, University of Adelaide, School of Economics.
    8. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    9. Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October.
    10. Hamilton, James D & Herrera, Ana Maria, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 265-86, April.
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