Energy price shocks and economic activity: Which energy price series should we be using?

- US state level effects of oil and alternative energy price shocks are examined.
- Energy prices: oil, gasoline, diesel, natural gas, heating oil, and electricity
- I examine which energy price produces the best forecasts of economic activity.
- Alternative energy prices lead to more accurate modeling of economic activity.

There is not one primary energy market and the price of oil is not a good proxy for many alternative energy prices. Therefore, this paper explores the effects of alternative energy price shocks on economic activity, and examines the relative performance of these alternative measures in predicting state level economic activity using the Davidson and MacKinnon J-test. The alternative energy price series considered are as follows: gasoline, diesel, natural gas, heating oil, and electricity. Alternative measures of energy price shocks produce different patterns of impulse responses than oil price shocks. Additionally, overwhelming evidence indicates that alternative energy price models, excluding models containing the price of gasoline, outperform the baseline model containing the price of oil for many states, particularly at short-to-mid forecast horizons. Using alternative energy prices should lead to a more accurate modeling of the energy price-macroeconomy relationship.