Macroeconomic Structure and Oil Price Shocks at the Industrial Level: Evidence form the Industries of Six OECD Countries Rebeca Jiménez-Rodríguez Department of Economics University of Salamanca E-37007 Salamanca (Spain) Phone: +34 923 29 46 40 (ext. 35 14) Fax: +34 923 29 46 86 e-mail: email@example.com Overview The study of the impact of oil price shocks at the aggregate level has attracted considerable interest in the literature over the past three decades. This literature reports a lower output growth and a higher inflation after an oil price increase in oil importing countries (see, e.g., Hamilton, 1983; Gisser and Goodwin, 1986; Jiménez-Rodríguez and Sánchez, 2005; Kilian. 2008; and Jiménez-Rodríguez and Sánchez, 2009). In sharp contrast to the volume of work investigating the effects of oil price shocks on output at the aggregate level, there has been relatively little work done on studying such effects at the industrial level (see Lee and Ni, 2002, for the US; Jiménez-Rodríguez, 2008, for economies other than the US).1,2 On the one hand, Lee and Ni (2002) showed, by using an identified multivariate VAR model, that oil price shocks have a variety of negative effects upon US industries, with oil shocks mostly reducing the supply of oilintensive industries and the demand of many other industries. On the other hand, Jiménez-Rodríguez (2008), using a recursively identified bivariate VAR model, reported the existence of homogeneity of industrial output responses across industries in Italy and the Anglo-Saxon countries (the UK and the US), as well as the existence of cross-industry heterogeneity in three of the four European Monetary Union (EMU) economies considered (France, Germany, and Spain). The latter author also showed evidence of heterogeneity of output responses across the four EMU economies (France, Italy, Germany, and Spain) and evidence of homogeneity in the Anglo-Saxon countries. In addition, this author also investigated possible explanations for these cross-country differences and found that such differences did not seem to be due to either oil consumption or product/labour market rigidity, although they could be partially explained by differences in the industrial structure. Other possible explanation (not explored up to now) that may help to better understand the cross-country differences is the role that the macroeconomic structure may play in the response of industry-level output to oil price shocks. The present paper extends the previous literature on oil price impacts by assessing the role of the macroeconomic block of the economy in the response of industrial output to an oil price shock for six OECD countries (France, Germany, Italy, Spain, the UK, and the US). To do so, we first estimate an identified multivariate VAR model for each country and each industry studied, and we then compare such results with those obtained from a recursively identified bivariate VAR model with oil prices and specific industrial output as variables (as in Jiménez-Rodríguez, 2008). The conclusion obtained from this analysis is important for policy-makers given that the macroeconomic policy implemented may (not) help to smooth the effects of oil price shocks on industrial output. Methodology We consider a pth-order structural Vector Autoregression model that includes both macrovariables and industry-level variables. Let Y1t be a (N₁×1) vector that contains the macroeconomic variables: the Total Industrial Production, the Consumer Price Index, a monetary aggregate, a nominal short-term intertest rate, the Real Effective Exchange Rate, and an oil price variable. Let Y2t be a (N₂×1) vector that contains 1 We find other authors who analysed the US industry-level effects of oil price shocks on other research topics (creation and destruction of manufacturing job, Davis and Haltinwager, 2001; inventory-sales, Herrera, 2007; and stock returns, Kilian and Park, 2008). 2 Bohi (1989) compared the industrial impact of oil prices in Japan, Germany, the UK, and the US, although his comparisons were informal. the specific industrial variables, in this case, the specific industrial output. All variables except interest rates are in logs. We impose, as Lee and Ni (2002) and Davis and Haltiwanger (2001) did, that macroeconomic variables affect industrial variables, but the latter variables do not affect the former variables. Thus, we assume that macroeconomic shocks are the same for all industries, and the cross-industry comparison of responses to such shocks is meaningful. We identify the model by using exclusion on the contemporaneous incidence of the structural shocks. The identified VAR is then used to obtain impulse responses to structural shocks. We estimate the structural VAR model by maximum likelihood. We apply this methodology to four EMU countries (namely, France, Germany, Italy and Spain), the UK, and the US. The macroeconomic data come both from IMF's International Financial Statistics, OECD's Main Economic Indicators, Deutsche Bundesbank, Banca d'Italia, National Government for Spain. The industrial data refer to eleven industries, grouped according to the two-digit International Standardized Industrial Classification (ISIC). The Data Appendix provides sources, and an explanation of the choice of the Industry database considered. The available sample runs from 1975:1 to 1998:12, for all countries but France and Spain where it starts in 1980:1. Main Results This paper analyses the role of the macroeconomic structure in the response of industrial output to an oil price shock in six OECD countries. The macroeconomic block of the economy does not seem to play a significant role in the response of industry-level output to oil price shocks in Germany, Italy, the UK, and the US, though it appears to be more relevant in France and Spain. Therefore, cross-country differences found in the responses of industrial output to oil price shocks within the European Monetary Union can be partially explained by differences in the macroeconomic structure. References Bohi, Douglas R. (1989), "Energy Price Shocks and Macroeconomic Performance", Washington DC: Resources for the Future. Davis, Steven J. and John Haltinwager (2001), "Sectoral Job Creation and Destruction Responses to Oil Price Changes", Journal of Monetary Economics, 48(3), 465-512. Gisser, Micha and Thomas H. Goodwin (1986), "Crude Oil and the Macroeconomy: Tests of Some Popular Notions", Journal of Money, Credit and Banking, 18(1), 95-103. Hamilton, James (1983), "Oil and the Macroeconomy Since World War II", Journal of Political Economy 91: 228-248. Herrera, Ana M. (2007), "Oil Price Shocks, Inventories and Macroeconomic Dynamics", mimeo, Michigan State University. Jiménez-Rodríguez, Rebeca (2008), "The Impact of Oil Price Shocks: Evidence from the Industries of Six OECD Countries", Energy Economics, 30(6), 3095-3108. Jiménez-Rodríguez, Rebeca and Marcelo Sánchez (2005), "Oil Price Shocks and Real GDP Growth: Empirical Evidence for some OECD Countries", Applied Economics 37: 201-228. Jiménez-Rodríguez, Rebeca and Marcelo Sánchez (2009), "Oil Shocks and the Macroeconomy: A Comparison across High Oil Price Periods", Forthcoming Applied Economics Letters. Kilian, Lutz (2008), "A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and Inflation in the G7 Countries", Journal of the European Economic Association, 6(1), 78-121. Kilian, Lutz and Cheolbeom Park (2008), "The Impact of Oil Price Shocks on the U.S. Stock Market". Forthcoming International Economic Review.