The Oil Price-Macroeconomy Relationship: Does Persistence Matter?

Abstract

The literature on the relationship between real output growth and the growth rate in the price of oil, including an allowance for asymmetry in the impact of oil prices on output, continues to evolve. Here we show that a new technique, which allows us to control for both this asymmetry and also for the persistence of oil price changes, yields results implying that such control is necessary for a statistically adequate specification of the relationship. The new technique also yields an estimated model for the relationship which is more economically interpretable. In particular, using quarterly data from 1976 - 2007 on each of six countries which are essentially net oil importers, we find that changes in the growth rate of oil prices which persist for more than four years have a large and statistically significant impact on future output growth, whereas less persistent changes (lasting more than one year but less than four years) have no significant impact on output growth. In contrast, 'temporary' fluctuations in the oil price growth rate - persisting for only a year or less - again have a large and statistically significant impact on output growth for most of these countries. The results for the single major net oil producer in our sample (Norway) are distinct in an interesting way.