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Abstract:
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A common view in the literature on the transmission of energy price shocks is that their effect on macroeconomic aggregates is asymmetric in energy price increases and decreases. We show that such models are misspecified, the parameter estimates are inconsistent, and the implied impulse responses have been computed incorrectly. As a result, the quantitative importance of energy price increases for the U.S. economy has been exaggerated. We develop alternative regression models, estimation methods, and methods of computing responses to energy price shocks and we show that the null hypothesis of symmetry in the responses to energy price increases and decreases has not been tested properly. We also propose a test of the net oil price increase model of Hamilton (1996, 2003).
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