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This paper investigates the time delay in the transmission of oil price shocks using disaggregated manufacturing data on inventories and sales. VAR estimates indicate that industry-level inventories and sales respond faster to an oil price shock than aggregate gross domestic product, especially in industries that are energy-intensive. In response to an unexpected oil price increase, sales drop and inventories are accumulated. This leads to future reductions in production. We estimate a modified linear-quadratic inventory model to inquire whether the patterns observed in the VAR impulse responses are consistent with rational behavior by the firms. Estimation results suggest that three mechanisms play a role in the industry-level dynamics. First, oil prices act as a negative demand shock. Second, the shock catches manufacturers by surprise, resulting in higher-than-anticipated inventories. Third, because of their desire to smooth production, manufacturers deviate from the target level of inventories and spread the decline in production over various quarters; hence the delay in the response of aggregate output.

Original languageEnglish
Pages (from-to)620-639
Number of pages20
JournalMacroeconomic Dynamics
Issue number3
StatePublished - Apr 1 2018

Bibliographical note

Funding Information:
This research was supported by the NSF under Grant SES-003840 and was partially completed while visiting Harvard’s Kennedy School of Government under a Repsol-YPF research fellowship. I am thankful to Jim Hamilton, Bill Hogan, Lutz Kilian, Valerie Ramey, and three anonymous referees, as well as participants at numerous conferences and seminars, for helpful comments and suggestions. Address correspondence to: Ana María Herrera, Department of Economics, Gatton College of Business and Economics, Lexington, KY 40506-0034, USA; e-mail: amherrera@uky.edu.


  • Inventories
  • Macroeconomic Fluctuations
  • Oil Shocks

ASJC Scopus subject areas

  • Economics and Econometrics


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