The Crude Oil Market and US Economic Activity: Revisiting the Empirical Evidence

This paper empirically analyses the relationship between oil prices and real economic activity in the US. We seek to contribute to the literature by reconsidering the measurement of oil prices. We do so by accounting for whether oil price shocks follow periods of quiescence or volatility, since the former oil price changes could be more shocking. This study also accounts for asymmetry of shocks, since both theory and our empirical findings indicate that positive shocks to oil prices have a greater impact on economic activity than negative ones. We implement a rolling window approach in VARs and IRFs to investigate the time-varying nature of the relationship. Based on these, we find no clear evidence of the oil price-macroeconomy relationship weakening over time. There is strong evidence for asymmetry across specifications, proxies, and sample periods. Impulse response analysis suggests that a rise in oil prices is expected to lead to a decline in output growth rate and that this effect is larger in the second half of the dataset.