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The economic effects of oil prices shocks on the UK manufacturing and services sector

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  • Guidi, Francesco

Abstract

This paper investigates the relationship between changes in oil prices and the UK’s manufacturing and services sector performances. Only a few studies have been conducted at the sector level: the goal of this paper is to contribute in that direction. After presenting review of existing literature about oil effects on the UK’s sectors of manufacturing and services, an econometric analysis is carried out. In a more detailed analysis, three sets of vector autoregressive (VAR) models are employed using linear and non-linear oil price specifications among several key macroeconomic variables. From the linear oil price specification VAR model, the impulse response function reveals that oil price movement causes positive effects in both the output of manufacturing and services sectors. The variance decomposition shows that oil prices are quite important as a cause of the variance of the UK services sector output, while they do not have such a large role in the variance of the UK’s manufacturing output. From the asymmetric specification, it has been found that positive oil price changes determine a consistent contraction in manufacturing output, while the services sector does not seem to be affected by increases. Alternatively, negative oil price changes, show that manufacturing output does not increase so much despite a decrease in oil prices. The services sector is much more affected by oil prices decreases than increases. Finally considering the net oil price increase (NOPI) specification, it has been found that the manufacturing sector is much more affected by oil price changes than the services sector.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16171.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:16171

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Keywords: Oil shock; VAR; impulse response function; variance decomposition;

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  1. 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.
  2. Darby, Michael R, 1982. "The Price of Oil and World Inflation and Recession," American Economic Review, American Economic Association, vol. 72(4), pages 738-51, September.
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  4. Lutkepohl, Helmut, 1990. "Asymptotic Distributions of Impulse Response Functions and Forecast Error Variance Decompositions of Vector Autoregressive Models," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 116-25, February.
  5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
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  7. P. J. Forsyth & J. A. Kay, 1981. "Oil revenues and manufacturing output," Fiscal Studies, Institute for Fiscal Studies, vol. 2(2), pages 9-17, July.
  8. Peter Isard & Ben Hunt & Douglas Laxton, 2001. "The Macroeconomic Effects of Higher Oil Prices," IMF Working Papers 01/14, International Monetary Fund.
  9. 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.
  10. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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  14. William H. Buiter & Marcus Miller, 1981. "The Thatcher Experiment: The First Two Years," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 315-380.
  15. Michael P. Keane & Eswar Prasad, 1995. "The Employment and Wage Effects of Oil Price Changes: A Sectoral Analysis," IMF Working Papers 95/37, International Monetary Fund.
  16. Bjornland, Hilde Christiane, 2000. "The Dynamic Effects of Aggregate Demand, Supply and Oil Price Shocks--A Comparative Study," Manchester School, University of Manchester, vol. 68(5), pages 578-607, September.
  17. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
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  19. Herrera, Ana María & Pesavento, Elena, 2009. "Oil Price Shocks, Systematic Monetary Policy, And The “Great Moderation”," Macroeconomic Dynamics, Cambridge University Press, vol. 13(01), pages 107-137, February.
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Cited by:
  1. Maria-Dolores, Ramon & José Rodolfo, Morales, 2012. "The Natural Resource Curse: An Analysis of the Dutch Case based on Sectoral Economies of Scale," UMUFAE Economics Working Papers 26673, DIGITUM. Universidad de Murcia.
  2. Alom, Fardous, 2011. "Economic Effects of Oil and Food Price Shocks in Asia and Pacific Countries: An Application of SVAR Model," 2011 Conference, August 25-26, 2011, Nelson, New Zealand 115346, New Zealand Agricultural and Resource Economics Society.

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