Nonlinear Effects of Oil Price Shocks: an Application to the US Economy

Oil price shocks have always been considered important drivers of macroeconomic fluctuations. However, as the seminal paper of Kilian (2009) shows, their effects strongly depend on the causes underlying them: supply-driven price shocks have different consequences on the economy than demand-driven ones. These conclusions are fundamental, but they are drawn from a linear VAR model. This means that, according to this model, oil appreciations and oil depreciations cause completely symmetric responses of the economy. This is not very plausible, as it is well documented that many shocks in the economy are nonlinear. So, in this work I extend Kilian's model and, following Forni et al. (2022), I use a new procedure, based on linear structural VAR models with exogenous variables (SVARX), to test for the asymmetry of a structural oil price shock. The results I find are interesting and suggest that there are significant asymmetries (of both sign and size) in the transmission mechanism of oil price shocks into the US economy. Hence, these conclusions highlight the necessity of building more complex structural models for oil markets, in order to disentangle the factors behind these nonlinear behaviors.