The Effects of Uncertainty about Oil Prices in G-7
The failure of decreases in oil prices to produce expansions that mirror the contractions associated with higher oil prices has been a topic of considerable interest. We investigate for the G-7 one explanation for this feature - the role of uncertainty about oil prices. In particular, we examine the link between oil price uncertainty and industrial production utilizing a very general and °exible empirical methodology that is based on a structural VAR modi¯ed to accommodate multivariate GARCH in mean. Our primary result is that oil price uncertainty has had a negative and signi¯cant e®ect on industrial production in four of the G-7 countries - Canada, France, UK and US. Impulse-response analysis suggests that, in the short-run, both positive and negative oil shocks may be contractionary. Our result helps explain why the sudden collapse in oil prices in the mid-1980's failed to produce rapid expansion in the G-7, and why the steady increases in oil prices from 2003-2007 did not induce recessions.
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