Asymmetric Reactions of the U.S. Natural Gas Market and Economic Activity

This paper provides new empirical evidence on the asymmetric reactions of the U.S. natural gas market and the U.S. economy to its market fundamental shocks in different phases of the business cycle. To this end, we employ a smooth-transition vector autoregression (STVAR) model to capture the asymmetric responses depending on economic conditions. Our results indicate that the STVAR model provides a plausible explanation to the behavior of the U.S. natural gas market, which reacts asymmetrically in both bad and good times. For example, a positive real oil price shock has a negative impact on natural gas production in recessions, while the responses of natural gas production to the same shock are significantly positive during expansions. In addition, the positive relationship between the oil and natural gas prices is more prominent in expansions in the long run. In addition, U.S. economic activity is found to be much more sensitive to oil and natural gas price shocks occurring in recessions than in expansions.