Are the macroeconomic effects of oil price shock symmetric?: A Factor-Augmented Vector Autoregressive approach

- The results in this paper are opposite to the findings of Kilian and Vigfusson (2012).
- The asymmetry is more evident in large shocks than in smaller shocks.
- The degree of asymmetry is larger in the short run than in the long run.
- The impulse responses of economic factors to oil shocks are asymmetric.

This paper aims to examine the asymmetric effect of oil price shocks on real economic activity in the U.S. within the context of a nonlinear Factor-Augmented Vector Autoregressive (FAVAR) model. By employing simulation methods, we trace the effects of positive and negative oil price shocks on the macroeconomic variables through the Impulse Response Function (IRF). It is found that the negative impacts of higher oil prices are larger than the positive effects of lower oil prices. And the asymmetric effects are more evident when the oil price shocks are larger. The results are robust to different lag specification and choice of factors.