What is new? The role of asymmetry and breaks in oil price–output growth volatility nexus

Raheem, Ibrahim and Olabisi, Nafisat (2019): What is new? The role of asymmetry and breaks in oil price–output growth volatility nexus. Published in: OPEC Economic Review , Vol. 43, No. 1 (2019): pp. 67-91.

Abstract

This study examines the role of asymmetry and breaks in oil price–output growth volatility nexus. A representative of 10 countries was selected from net oil-exporting and-importing economies for the period 1986–2017. It is hypothesised that countries respond differently to changes in oil price. To prove this point, we use the recent nonlinear ARDL of Shin et al. (2014), based on the framework of the dynamic common correlated effect of the heterogeneous panel of Chudik and Pesaran (2015), to decompose oil price into positive and negative partial sums. Our results show that without accounting for breaks, asymmetry only matters for net oil exporters in both short- and long run. However, accounting for breaks expanded the importance of asymmetry to net oil importers (in the short run). These results are robust to changes in the measures of oil price and growth volatility.

• Item Type: MPRA Paper
• Language: English
• Keywords: Oil, Asymmetry, Breaks
• Subjects: C - Mathematical and Quantitative Methods > C0 - General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C50 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General

References

Abiyev, V., Ceylan, R. and Ozg € € ur, M., 2015. The effects of oil price shocks on Turkish business cycle: a Markov switching approach. International Journal of Business and Economic Sciences Applied Research 8, 2, 7–18.

Ajide, K.B., Adeniyi, O. and Raheem, I., 2015. Output growth volatility, remittances and institutions. International Journal of Development Issues 14, 3, 190–203.

Ajide, K.B., Adeniyi, O. and Raheem, I., 2016. The role of institutions in output growth volatility financial development nexus: a worldwide study. Forthcoming in Journal of Economic Studies 43, 6, 910–927.

Allegret, J.-P., Couharde, C. and Coulibaly, D., 2014. Current accounts and oil price fluctuations in oil-exporting countries: the role financial development. Journal of International Money and Finance 47, 1, 185–201.

An, L., Jin, X. and Ren, X., 2014. Are the macroeconomic effects of oil price shock symmetric? A factor-augmented vector autoregressive approach. Energy Economics 45, 217–228.

Awartani, B. and Maghyereh, A., 2013. Dynamic spillovers between oil and stock markets in the Gulf Cooperation Council countries. Energy Economics 36, 28–42.

Bai, J. and Perron, P., 2003. Computation and analysis of multiple structural change models. Journal of applied econometrics 18, 1, 1–22.

Balke, N.S., Brown, S.P.A. and Yucel, M.K., 2002. Oil price shocks and the U.S. economy: Where does the asymmetry originate? Energy Journal, 23, 1, 27–52.

Barsky, R.B. and Kilian, L., 2002. Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative. in Bernanke, B.S. and Rogoff, K. (eds.) NBER Macroeconomics Annual 2001, MIT Press, Cambridge, MA, pp. 137–183.

Bernanke, B.S., Gertler, M. and Watson, M. 1997. Systematic monetary policy and the effects of oil price shocks. Brookings Papers on Economic Activity 1, 91–142.

Bohi, D.R., 1991. On the macroeconomic effects of energy price shocks. Resources and Energy, 13, 145–162.

Breitung, J. and Candelon, B., 2005. Purchasing power parity during currency crises: a panel unit root test under structural breaks. Review of World Economics 141, 1, 124–140.

Brown, S. and Y€ ucel, M., 1999. Oil prices and US aggregate economic activity. Federal Reserve Bank of Dallas Economic Review (Second Quarter) 16–23.

Burbidge, J. and Harrison, A., 1984. Testing for the effects of oil-price rises using vector autoregressions. International Economic Review 25, 2, 459–484.

Carlstrom, C.T. and Fuerst, T.S., 2006. Oil prices, monetary policy, and counterfactual experiments. Journal of Money, Credit and Banking 38, 1945–1958.

Chami, R., Hakura, D. and Montiel, P., 2009. Remittances: An automatic output stabilizer? IMF Working Paper 09/91.

Chudik, A. and Pesaran, M.H., 2015. Common correlated effects estimation of heterogeneous dynamic panel data models with weakly exogenous regressors. Journal of Econometrics 188, 393–420.

Chudik, A., Pesaran, M.H. and Tosetti, E., 2011. Weak and strong cross-section dependence and estimation of large panels. The Econometrics Journal 14, C45–C90.

Clements, M.P. and Krolzig, H.M., 2002. Can oil shocks explain asymmetries in the U.S. Business Cycle? Empirical Economics, 27, 2, 185–204.

Cologni, A. and Manera, M., 2009. The asymmetric effects of oil shocks on output growth: a Markov-switching analysis for the G-7 countries. Economic Modelling 26, 1–29.

Culver, S.E. and Papell, D.H., 1997. Is there a unit root in the inflation rate? Evidence from sequential break and panel data models. Journal of Applied Econometrics 12, 4, 435– 444.

Darby, M.R., 1982. The price of oil and world inflation and recession. American Economic Review 72, 4, 738–751.

Ebeke, C. and Combes, J.-L., 2013. Do remittances dampen the effect of natural disasters on output growth volatility in developing countries? Applied Economics 45, 2241–2254.

Eberhardt, M. and Presbitero, A., 2015. Public debt and growth: heterogeneity and non-linearity. Journal of International Economics 97, 1, 45–58.

Edelstein, P. and Kilian, L., 2007. The response of business fixed investment to energy price changes: a test of some hypotheses about the transmission of energy price shocks. B.E. Journal of Macroeconomics 7 (November), 1–39.

Edelstein, P. and Kilian, L., 2009. How sensitive are consumer expenditures to retail energy prices? Journal of Monetary Economics 56, 766–779.

Engemann, K.M., Kliesen, K.L. and Owyang, M.T., 2011. Do oil shocks drive business cycles? Some U.S. and international evidence. Macroeconomic Dynamics 15, 498–517.

Finn, M.G., 2000. Perfect competition and the effects of energy price increases on economic activity. Journal of Money, Credit, and Banking, 32, 400–416.

Gisser, M. and Goodwin, T.H., 1986. Crude oil and the macroeconomy: tests of some popular notions. Journal of Money, Credit, and Banking, 18, 95–103.

Hadri, K., 2002. Testing for stationarity in heterogeneous panel data. Econometrics Journal 32, 148–161.

Hamilton, J.D., 1983. Oil and the macroeconomy since world war II. Journal of Political Economy 91, 228–248.

Hamilton, J.D., 1996. This is what happened to the oil price-macroeconomy relationship. Journal of Monetary Economics 38, 215–220.

Hamilton, J.D. and Herrera, A.M., 2004. Oil shocks and aggregate macroeconomic behavior: the role of monetary policy. Journal of Money, Credit, and Banking, 36, 265–286.

Hooker, M.A., 1996. What happened to the oil price-macroeconomy relationship? Journal of Monetary Economics, 38, 195–213.

Hooker, M.A., 2002. Are oil shocks inflationary? Asymmetric and nonlinear specifications versus changes in regime. Journal of Money Credit and Banking 34, 2, 540–561.

Huang, B.N., Hwang, M.J. and Peng, H.P., 2005. The asymmetry of the impact of oil price shocks on economic activities: an application of the multivariate threshold model. Energy Economics 27, 455–476.

Im, K.S., Pesaran, M.H and Shin, Y., 1997. “Testing for unit roots in heterogeneous panels” mimeo: Department of Applied Economics, University of Cambridge.

Jimenez-Rodriguez, R. and Sanchez, M., 2005. Oil price shocks and real GDP growth: empirical evidence for some OECD countries. Applied Economics, 37, 2, 201–222.

Jouini, J. and Harrathi, N., 2014. Revisiting the shock and volatility transmissions among GCC stock and oil markets: a further investigation. Economic Modelling 38, 486–494.

Kilian, L., 2008. Exogenous oil supply shocks: How big are they and how much do they matter for the U.S. economy? Review of Economics and Statistics 90, 216–240.

Kilian, L., Rebucci, A. and Spatafora, N., 2009. Oil shocks and external balances. Journal of International Economics 77, 2, 181–194.

Kim, I. and Loungani, P., 1992. The role of energy in real business cycle models. Journal of Monetary Economics 29, 173–189.

Leduc, S. and Sill, K., 2004. A quantitative analysis of oil-price shocks, systematic monetarypolicy, and economic downturns. Journal of Monetary Economics, 51, 781–808.

Lee, K., Ni, S. and Ratti, R.A., 1994. Oil shocks and the macroeconomy: the role of price variability. The Energy Journal 16, 4, 39–56.

Levin, A., Lin, C.F. and Chu, C.S.J., 2002. Unit root tests in panel data: asymptotic and inite sample properties. Journal of Econometrics 108, 1, 1–24.

Mehrara, M., 2008. The asymmetric relationship between oil revenues and economic activities: the case of oil-exporting countries. Energy Policy 36, 1164–1168.

Mendoza, O. and Vera, D., 2010. The asymmetric effects of oil shocks on an oil-exporting economy. Cuadernos De Economıa 47, 135, 3–13.

Mork, K.A., 1989. Oil and the macroeconomy when prices go up and down: an extension of Hamilton’s results. Journal of Political Economy 97, 3, 740–744.

Mork, K.A., Olsen, O. and Mysen, H.T., 1994. Macroeconomic responses to oil price increases and decreases in seven OECD countries. Energy Journal, 15, 4, 19–35.

Moshiri, S., 2015. Asymmetric effect of oil price shocks in oil-exporting countries, the role of institutions. OPEC Energy Review 39, 2, 222–245.

Moshiri, S. and Banijashem, A., 2012. Asymmetric effects of oil price shocks on economic growth of oil-exporting countries. Social Science Research Network (SSRN). http://papers.ssrn.com/sol3/papers.cfm?abstract_id¼2006763

Nakov, A. and Pescatori, A., 2010. Oil and the great moderation. Economic Journal, Royal Economic Society 120, 543, 131–156.

Narayan, P.K. and Liu, R., 2015. A unit root model for trending time-series energy variables. Energy Economics 50, 391–402. Nusair, S.A., 2016. The effects of oil price shock s on the economies of the Gulf Co-operation Council countries: nonlinear analysis. Energy Policy 91, 256–267.

Pesaran, M.H., 2006. Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica 74, 4, 967–1012.

Pesaran, M., Shin, Y. and Smith, R., 2001. Bound testing approaches to the analysis of level relationship. Journal of Applied Econometrics 16, 289–326.

Rafiq, S., Sgro, P. and Apergis, N., 2016. Asymmetric oil shocks and external balances of major oil exporting and importing countries. Energy Economics 56, 1, 42–50.

Raheem, I.D., 2016. ‘More Finance’ or ‘Better Finance’ in output growth volatility literature: evidence from a global perspective. Journal of International Economic Studies 30, 1, 61–68.

Raheem, I.D., 2017. Asymmetry and break effects of oil price –macroeconomic fundamentals dynamics: the trade effect channel. The Journal of Economic Asymmetries, 16, 12–25.

Rahman, S. and Serletis, A., 2011. The asymmetric effects of oil price shocks. Macroeconomic Dynamics 15, 3, 437–471.

Ramey, G. and Ramey, V., 1995. Cross-country evidence on the link between volatility and growth. American Economic Review 85, 5, 1138–1151.

Raymond, J.E. and Rich, R.W., 1997. Oil and the macroeconomy: a Markov state-switching approach. Journal of Money, Credit and Banking, 29 (May), 193–213. Erratum 29 (November, Part 1), p. 555

Rotemberg, J.J. and Woodford, M., 1996. Imperfect competition and the effects of energy price increases. Journal of Money, Credit, and Banking, 28 (part 1), 549–577.

Sadorsky, P., 1999. Oil price shocks and stock market activity. Energy Economics 21, 449–469.

Salisu, A.A. and Fasanya, I.O., 2013. Modelling oil price volatility with structural breaks. Energy Policy 52, 554–562.

Salisu, A.A. and Isah, K., 2016. Revisiting the oil price and stock market nexus: A nonlinear Panel ARDL approach. Economic Modelling 66, 258–271.

Salisu, A.A. and Oloko, T.F., 2015. Modeling oil price–US stock nexus: A VARMA–BEKK–AGARCH approach. Energy Economics 50, 1–12.

Salisu, A.A., Isah, K.O., Oyewole, O.J. and Akanni, L.O., 2017. Modelling oil price-inflation nexus: the role of asymmetries. Energy 125, 1, 97–106.

Sek, S.K., 2017. Impact of oil price changes on domestic price inflation at disaggregated levels: evidence from linear and nonlinear ARDL modeling. Energy 130, 204–217.

Serletis, A. and Istiak, K., 2013. Is the oil price–output relation asymmetric? Journal of Economic Asymmetries 10, 1, 10–20. Shin, Y., Yu, B. and Greenwood-Nimmo, M., 2014. Modelling asymmetric cointegration and dynamic multipliers in an ARDL framework. In Horrace, W.C.

Van Hoang, T.H., Lahiani, A. and Heller, D., 2016. Is gold a hedge against inflation? New evidence from a nonlinear ARDL approach. Economic Modelling 54, 54–66.