Quantitative Economics: Nov, 2011, Volume 2, Issue 3

Are the responses of the U.S. economy asymmetric in energy price increases and decreases?

Lutz Kilian, Robert J. Vigfusson

How much does real gross domestic product (GDP) respond to unanticipated
changes in the real price of oil? Commonly used censored oil price vector autore-
gressive models suggest a substantial decline in real GDP in response to unex-
pected increases in the real price of oil, yet no response to unexpected declines.
We show that these estimates are invalid. Based on a structural model that encom-
passes both symmetric and asymmetric models as special cases, correctly com-
puted impulse responses are of roughly the same magnitude in either direction,
consistent with formal tests for symmetric responses. We discuss implications for
theoretical models and for policy responses to energy price shocks.
Keywords. Asymmetry, oil price, energy prices, net increase, shocks, propaga-
tion, transmission, vector autoregression.
JEL classification. C32, E37, Q43.

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