The asymmetric effects of oil price changes on unemployment: Evidence from Canada and the U.S

Abstract

This paper employs the linear autoregressive distributed lag (ARDL) model of Pesaran et al. (2001) and the asymmetric nonlinear ARDL (NARDL) model of Shin et al. (2013) to examine the symmetric and asymmetric effects of oil price shocks on the unemployment rates of Canada and the U.S. Asymmetries are introduced via positive and negative partial sum decompositions of oil price. Cointegration tests confirm the existence of a long-run relationship between real input prices (oil price and interest rate) and the unemployment rates. The linear ARDL model suggests that, although oil price changes have no or minor short-run effect on the unemployment rates, they have a significant and positive long-run effect in all the cases. The NARDL model gives a different picture for the effect of oil price changes on the unemployment rates. While only falling oil prices have a significant short-run effect on the unemployment rates, rising and falling oil prices have a significant and positive long-run effect in all the cases. The results suggest significant evidence of asymmetries both in the short-run and long-run with falling oil prices having a larger impact than rising prices.