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30-05-2020

The effect of oil price shocks on economic activity: a local projections approach

Authors: Mirko Abbritti, Juan Equiza-Goñi, Fernando Perez de Gracia, Tommaso Trani

Published in: Journal of Economics and Finance | Issue 4/2020

Abstract

We examine the impact of oil price shocks on four U.S. macroeconomic variables over the period January 1974 to August 2016. We use local projections and consider different linear and nonlinear model specifications. The results suggest that oil price shocks have a large and significant effect not only on production, interest rates and unemployment, but also on credit spreads. The magnitude of these effects depends on the level of the oil price before the occurrence of the shock.

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See, for example, the initial papers in the 1980s by Rasche and Tatom (1981), Bruno and Sachs (1982), and the influential study by Hamilton (1983). For recent reviews of the literature, see Herrera et al. (2019) or Kilian and Zhou (2020).

See Jordà (2005) and Barnichon and Brownlees (2019), and, for a discussion on efficiency, Ramey (2016). In a recent paper, Plagborg-Møller and Wolf (2019) prove that LPs and VARs estimate the same responses.

Alloza Frutos (2017) and Ramey and Zubairy (2018) investigates using LPs the non-linear effects of government spending shocks; Alpanda and Zubairy (2019) uses the same technique to study monetary policy effectiveness, and Duval et al. (2017) to analyze the effect of job protection deregulation.

The data can be downloaded from Gilchrist’s web page (http://people.bu.edu/sgilchri/Data/data.htm).

An Appendix with further robustness exercises is available upon request.

Linear responses are very similar to those of the normal oil price state therefore they are not reported.

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Title: The effect of oil price shocks on economic activity: a local projections approach
Authors: Mirko Abbritti
Juan Equiza-Goñi
Fernando Perez de Gracia
Tommaso Trani
Publication date: 30-05-2020
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 4/2020
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-020-09512-w

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