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International Evidence On The Oil Price-Real Output Relationship: Does Persistence Matter?

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  • Richard A. Ashley
  • Kwok Ping Tsang

Abstract

The literature on the relationship between real output growth and the growth rate in the price of oil, including an allowance for asymmetry in the impact of oil prices on output, continues to evolve. Here we show that a new technique, which allows us to control for both this asymmetry and also for the persistence of oil price changes, yields results implying that such control is necessary for a statistically adequate specification of the relationship. The new technique also yields an estimated model for the relationship which is more economically interpretable. In particular, using quarterly data from 1976 - 2007 on each of six countries which are essentially net oil importers, we find that changes in the growth rate of oil prices which persist for more than four years have a large and statistically significant impact on future output growth, whereas less persistent changes (lasting more than one year but less than four years) have no significant impact on output growth. In contrast, 'temporary' fluctuations in the oil price growth rate - persisting for only a year or less – again have a large and statistically significant impact on output growth for most of these countries. The results for the single major net oil producer in our sample (Norway) are distinct in an interesting way.

Suggested Citation

  • Richard A. Ashley & Kwok Ping Tsang, 2013. "International Evidence On The Oil Price-Real Output Relationship: Does Persistence Matter?," Working Papers e07-42, Virginia Polytechnic Institute and State University, Department of Economics.
  • Handle: RePEc:vpi:wpaper:e07-42
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    File URL: ftp://repec.econ.vt.edu/Papers/Ashley/ashley_tsang_oil_price.pdf
    File Function: First version, 2013
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    References listed on IDEAS

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    1. Piazzesi, Monika & Schneider, Martin & Tuzel, Selale, 2007. "Housing, consumption and asset pricing," Journal of Financial Economics, Elsevier, vol. 83(3), pages 531-569, March.
    2. Gonzalo, Jesus & Granger, Clive W J, 1995. "Estimation of Common Long-Memory Components in Cointegrated Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 27-35, January.
    3. Martin Lettau & Sydney C. Ludvigson, 2014. "Shocks and Crashes," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 293-354.
      • Martin Lettau & Sydney C. Ludvigson, 2013. "Shocks and Crashes," NBER Chapters,in: NBER Macroeconomics Annual 2013, Volume 28, pages 293-354 National Bureau of Economic Research, Inc.
    4. Richard A. Ashley & Randall J. Verbrugge., 2006. "Mis-Specification in Phillips Curve Regressions: Quantifying Frequency Dependence in This Relationship While Allowing for Feedback," Working Papers e06-11, Virginia Polytechnic Institute and State University, Department of Economics.
    5. Richard A. Ashley & Kwok Ping Tsang, 2014. "Credible Granger-Causality Inference with Modest Sample Lengths: A Cross-Sample Validation Approach," Econometrics, MDPI, Open Access Journal, vol. 2(1), pages 1-20, March.
    6. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2007. "Enhanced routines for instrumental variables/generalized method of moments estimation and testing," Stata Journal, StataCorp LP, vol. 7(4), pages 465-506, December.
    7. Richard Ashley & Kwok Ping Tsang & Randal J. Verbrugge, 2010. "Frequency Dependence in a Real-Time Monetary Policy Rule," Working Papers e07-21, Virginia Polytechnic Institute and State University, Department of Economics.
    8. Richard Ashley & Randal Verbrugge, 2009. "Frequency Dependence in Regression Model Coefficients: An Alternative Approach for Modeling Nonlinear Dynamic Relationships in Time Series," Econometric Reviews, Taylor & Francis Journals, vol. 28(1-3), pages 4-20.
    9. Engelhardt, Gary V., 1996. "House prices and home owner saving behavior," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 313-336, June.
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    Cited by:

    1. Ciner, Cetin, 2015. "Are equities good inflation hedges? A frequency domain perspective," Review of Financial Economics, Elsevier, vol. 24(C), pages 12-17.
    2. Katircioglu, Salih Turan & Sertoglu, Kamil & Candemir, Mehmet & Mercan, Mehmet, 2015. "Oil price movements and macroeconomic performance: Evidence from twenty-six OECD countries," Renewable and Sustainable Energy Reviews, Elsevier, vol. 44(C), pages 257-270.

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    Keywords

    oil price; frequency dependence; business cycle; nonlinearities;

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