The asymmetry of the impact of oil price shocks on economic activities: An application of the multivariate threshold model

This paper applies the multivariate threshold model to investigate the impacts of an oil price change and its volatility on economic activities (changes in industrial production and real stock returns). The statistical test on the existence of a threshold effect indicates that a threshold value does exist. Using monthly data of the US, Canada, and Japan during the period from 1970 to 2002, we conclude: (i) the optimal threshold level seems to vary according to how an economy depends on imported oil and the attitude towards adopting energy-saving technology; (ii) an oil price change or its volatility has a limited impact on the economies if the change is below the threshold levels; (iii) if the change is above threshold levels, it appears that the change in oil price better explains macroeconomic variables than the volatility of the oil price; and (iv) if the change is above threshold levels, a change in oil price or its volatility explains the model better than the real interest rate.