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OIL PRICE SHOCKS, INVENTORIES, AND MACROECONOMIC DYNAMICS

Published online by Cambridge University Press:  30 January 2018

Ana María Herrera
Ana María Herrera*
Affiliation:
University of Kentucky
*
Address correspondence to: Ana María Herrera, Department of Economics, Gatton College of Business and Economics, Lexington, KY 40506-0034, USA; e-mail: amherrera@uky.edu.
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Abstract

This paper investigates the time delay in the transmission of oil price shocks using disaggregated manufacturing data on inventories and sales. VAR estimates indicate that industry-level inventories and sales respond faster to an oil price shock than aggregate gross domestic product, especially in industries that are energy-intensive. In response to an unexpected oil price increase, sales drop and inventories are accumulated. This leads to future reductions in production. We estimate a modified linear–quadratic inventory model to inquire whether the patterns observed in the VAR impulse responses are consistent with rational behavior by the firms. Estimation results suggest that three mechanisms play a role in the industry-level dynamics. First, oil prices act as a negative demand shock. Second, the shock catches manufacturers by surprise, resulting in higher-than-anticipated inventories. Third, because of their desire to smooth production, manufacturers deviate from the target level of inventories and spread the decline in production over various quarters; hence the delay in the response of aggregate output.

Keywords

Oil ShocksMacroeconomic FluctuationsInventories
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Special Issue 3: Dynamics of Oil and Commodities Prices , April 2018 , pp. 620 - 639
Copyright
Copyright © Cambridge University Press 2018 

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Footnotes

This research was supported by the NSF under Grant SES-003840 and was partially completed while visiting Harvard's Kennedy School of Government under a Repsol-YPF research fellowship. I am thankful to Jim Hamilton, Bill Hogan, Lutz Kilian, Valerie Ramey, and three anonymous referees, as well as participants at numerous conferences and seminars, for helpful comments and suggestions.

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