Publication Date
10-2016
Recommended Citation
Charles, Amelie; Chua, Chew Lian; and Suardi, Sandy, On the Pernicious Effects of Oil Price Uncertainty on U.S. Real Economic Activities, Department of Economics, University of Wollongong, Working Paper 16-02, 2016.
https://ro.uow.edu.au/commwkpapers/343
Abstract
The last five decades have witnessed dramatic changes in crude oil price dynamics. We identify the influence of extreme oil shocks and changing oil price uncertainty dynamics associated with economic and political events. Neglecting these features of the data can lead to model misspecification that gives rise to: firstly, an explosive volatility process for oil price uncertainty; and secondly, erroneous output growth dynamic responses to oil shocks. Unlike past studies, our results show that the sharp increase in oil price uncertainty after mid-1985 has a pernicious e¤ect on output growth. Output growth responds symmetrically (asymmetrically) to positive and negative shocks in the period when oil price uncertainty is lower (higher) and more (less) persistent before (after) mid- 1985. These contrasting results from Elder and Serletis (2010) highlight the importance of accounting for outliers and volatility breaks in oil price and output growth, and the need to better understand the response of economic activity to oil shocks in the presence of oil price uncertainty.