Are the macroeconomic effects of oil-price changes symmetric?

Abstract

Oil prices fell in half between the end of 1985 and the second quarter of 1986, giving rise to a renewed debate over the effects of oil-price changes generally and whether the effects of oil-price declines are simply the reverse of oil price increases. This paper examines these issues. First, the theoretical basis of oiland energy-price effects on the economy are reviewed as well as the evidence on competing hypotheses about energy price effects. In Section II, the comparability of recent oi 1 and energy price declines to previous United States shocks is examined. Presumably, it matters whether the recent shock is permanent or transitory. It is argued here that the decline is permanent and, therefore, comparable to the 197374 and 1979-80 energy price shocks. The magnitude of the shock is comparable as well; United States oil prices doubled in each of the previous shocks, while recently the price has been halved. This section also discusses the issue of whether energy price shocks have symmetric effects on the economy. Finally, this section emphasizes that the recent decline in oil and energy prices is not unprecedented in the United States, and, therefore, the effects of such a shock are not unknown. The relative price of oil and energy in the United States fell from the second quarter of 1981 to the end of 1985 to a greater extent than recently. Thus, there are nearly five years of asyrmnetry question. In the third section, price changes on the United experience that can be used to examine the