Do all oil price shocks have the same impact? Evidence from the euro area

Abstract

Oil price shocks have become one of the main sources of macroeconomic fluctuations such as economic activity and inflation. This paper investigates the asymmetric effects of oil price shocks in the euro area by using a threshold VAR model estimated by Bayesian techniques. This approach captures the dependence of the transmission mechanism of oil price shocks on a) the sign of the shock and b) different states of the economy. The results suggest that oil price shocks have a stronger effect on output during periods of heightened uncertainty compared with periods of lowered uncertainty. This is partly due to the fact that, particularly during stressed periods, stock market reacts negatively following a positive oil price shock. In addition, positive and negative, large and small oil price shocks affect inflation differently. The findings suggest that policymakers should take into account the asymmetric nature of the oil price transmission mechanism when they are choosing how to respond to oil price shocks.