Oil price effects on personal consumption expenditures

Abstract

This paper uses a logistic smooth transition model to examine the impact of rising oil prices on personal consumption expenditures in open and industrialized economies. The empirical results suggest a nonlinear and asymmetric relation between oil price changes and personal consumption expenditures. In particular, the effects of rising oil prices on personal consumption expenditures are greater than those of falling oil prices. While oil price changes affect personal consumption expenditures via real balance effects, smooth transition effects also come into play. Below a threshold value, an increase in oil prices reduces personal consumption expenditures. In other words, in the face of uncertainty regarding future oil prices, consumers initially rationally postpone spending. However, once oil prices above the threshold after a prolonged upward trend, the prices of domestic production factors rise. This fuels continued price hikes and further increases personal consumption expenditures until a cost-pushed inflation takes hold. Due to differences in economic developments and structures, the effects of rising oil prices vary from one country to another, with different countries usually to different monetary policies from each other. As a result, personal consumption expenditures also show various patterns across countries.