OIL PRICE SHOCKS, INVENTORIES, and MACROECONOMIC DYNAMICS

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10 Scopus citations

Abstract

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
Volume22
Issue number3
DOIs
StatePublished - Apr 1 2018

Bibliographical note

Publisher Copyright:
Copyright © Cambridge University Press 2018.

Keywords

  • Inventories
  • Macroeconomic Fluctuations
  • Oil Shocks

ASJC Scopus subject areas

  • Economics and Econometrics

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