What is an oil shock? Panel data evidence

Abstract

This article characterizes the nonlinear relation between oil price change and GDP growth, focusing on the panel data of various industrialized countries. Toward this end, the article extends a flexible nonlinear inference to the panel data analysis where the random error components are incorporated into the flexible approach. The article reports clear evidence of nonlinearity in the panel and confirms earlier claims in the literature-oil price increases are statistically and economically significant while oil price decreases are not and previous upheaval in oil prices causes the marginal effect of any given oil price change to be reduced. Our result suggests that the nonlinear oil-macroeconomy relation is generally observable over different industrialized countries and it is desirable for one to use the nonlinear function of oil price change for GDP forecast.