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

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  • Melichar, Mark

Abstract

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.

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  • Melichar, Mark, 2016. "Energy price shocks and economic activity: Which energy price series should we be using?," Energy Economics, Elsevier, vol. 54(C), pages 431-443.
    • Handle: RePEc:eee:eneeco:v:54:y:2016:i:c:p:431-443
    DOI: 10.1016/j.eneco.2015.12.017
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    7. Bachmeier, Lance J. & Nadimi, Soheil R., 2018. "Oil shocks and stock return volatility," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 1-9.
    8. Christina Anderl & Guglielmo Maria Caporale, 2024. "A Global Oil Market Model with Shipping Costs," CESifo Working Paper Series 11551, CESifo.
    9. Sanusi, Muhammad Surajo & Ahmad, Farooq, 2016. "Modelling oil and gas stock returns using multi factor asset pricing model including oil price exposure," Finance Research Letters, Elsevier, vol. 18(C), pages 89-99.
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    14. Afees A. Salisu & Ahamuefula E.Oghonna & Rangan Gupta & Oguzhan Cepni, 2024. "Energy Market Uncertainties and US State-Level Stock Market Volatility: A GARCH-MIDAS Approach," Working Papers 202409, University of Pretoria, Department of Economics.
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    More about this item

    Keywords

    Oil price shock; Energy price shock; Economic activity; State level; Forecasting;
    All these keywords.

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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