The Journal of Economic Asymmetries 10 (2013) 10–20

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The Journal of Economic Asymmetries

www.elsevier.com/locate/jeca

Is the oil price–output relation asymmetric? ✩

Apostolos Serletis ∗ , Khandokar Istiak
Department of Economics, University of Calgary, Calgary, Alberta T2N 1N4, Canada

a r t i c l e i n f o a b s t r a c t

Article history: In this paper we investigate the relationship between the real price of oil and industrial
Received 23 April 2013 production for the G-7 countries, using post-1973 data. We test whether the relationship
Received in revised form 7 June 2013 between industrial production and the real price of oil is symmetric using slope-based
Accepted 11 June 2013
tests as well as tests of the null hypothesis of symmetric impulse responses. Based on
Available online 29 July 2013
the impulse response function tests, we find that for France and the United Kingdom
Keywords: the response of the industrial production growth rate to positive and negative oil price
Asymmetry shocks is symmetric, for Canada, Germany, Italy, and Japan it is (in general) asymmetric at
Oil price shocks almost all horizons for both small and large oil price shocks, and for the United States it is
Impulse response test symmetric at all horizons for small shocks but asymmetric at all horizons for large shocks.
© 2013 Elsevier Inc. All rights reserved.

1. Introduction

The relationship between the price of oil and the level of economic activity is a fundamental empirical issue in macroe-
conomics. Hamilton (1983) showed that oil prices had significant predictive content for real economic activity in the United
States prior to 1972 while Hooker (1996) argued that the estimated linear relations between oil prices and economic ac-
tivity appear much weaker after 1973. In the debate that followed, it has been suggested that the apparent weakening of
the relationship between oil prices and economic activity is illusory, arguing instead that the true relationship between oil
prices and real economic activity is nonlinear and asymmetric, with the correlation between oil price decreases and output
significantly different than the correlation between oil price increases and output — see, for example, Mork (1989) and
Hamilton (2003).
Recently, however, there has been renewed interest in the transmission of oil price shocks to real output, with Kilian and
Vigfusson (2011a) raising questions regarding the methodology used in the past to test for nonlinearities and asymmetries
in the response of real output to positive and negative oil price shocks. They argue that earlier tests focus on the wrong
null hypothesis and propose a direct test of the null hypothesis of symmetric impulse responses to positive and negative oil
price shocks based on impulse response functions, arguing that this is the hypothesis of interest to economists. As Kilian and
Vigfusson (2011a, pp. 436–437) put it, “what is at issue in conducting this impulse-response-based test is not the existence
of asymmetries in the reduced form parameters, but the question of whether possible asymmetries in the reduced form
imply significant asymmetries in the impulse response function.”
Kilian and Vigfusson (2011a) use a nonlinear structural VAR and a Wald test to test the null hypothesis of symmetric im-
pulse responses to positive and negative oil price shocks of the same size and show that for typical (one-standard deviation)
shocks the linear and symmetric model appears to provide a very good approximation to the responses of U.S. real GDP

✩
We would like to thank Lutz Kilian and Robert Vigfusson for making their MATLAB code for the impulse response function test available to us. We also
thank Lutz Kilian and two anonymous referees for useful comments and suggestions that improved the paper.
* Corresponding author. Tel.: +1 403 220 4092; fax: +1 403 282 5262.
E-mail address: Serletis@ucalgary.ca (A. Serletis).
URL: http://econ.ucalgary.ca/serletis.htm (A. Serletis).

1703-4949/$ – see front matter © 2013 Elsevier Inc. All rights reserved.
http://dx.doi.org/10.1016/j.jeca.2013.06.001
 A. Serletis, K. Istiak / The Journal of Economic Asymmetries 10 (2013) 10–20 11

to innovations in the real price of oil. Herrera et al. (2011a) also apply the Kilian and Vigfusson (2011a) test while using
both aggregate and disaggregate monthly industrial production series as a proxy for real economic activity in the United
States. Consistent with the results of Kilian and Vigfusson (2011a), they find no support against the null of symmetry at the
aggregate level, but find some support for nonlinearity at the disaggregate level in the case of large (two-standard deviation)
shocks.
In this paper we move the literature forward by investigating the relationship between industrial production and the
real price of oil for each of the G-7 countries — Canada, France, Germany, Italy, Japan, the United Kingdom, and the United
States. We employ the censored oil price VAR methodology that Kilian and Vigfusson (2011a) argue is invalid as well as the
new impulse response function test of Kilian and Vigfusson (2011a), in order to investigate the robustness of our results to
alternative testing methodologies. In doing so, we use monthly data on industrial production and the real price of oil and
an updated sample (from 1974:1 to 2011:7) that includes the increased volatility in oil prices since 2008 and the Great
Recession.
It is to be noted that in earlier and independent work, Herrera, Lagalo, & Wada (2011b) ask the same question as we
do in this paper with essentially the same methodology and a broader data set for 18 OECD countries over the period
from 1974:1 to 2010:7. They make a distinction between oil importers and oil exporters and also consider three groups of
countries — the G-7, OECD-Europe, and OECD-Total. We find that our results are in general consistent with those of Herrera
et al. (2011b). In particular, we cannot reject the null of symmetry for France and the United Kingdom. We reject the null
of symmetry for Canada, Germany, Italy, and Japan at almost all horizons for both small and large oil price shocks. For the
United States, we find that the response of the industrial production growth rate to positive and negative oil price shocks is
symmetric at all horizons for small shocks but asymmetric at all horizons for large shocks.
The outline of the paper is as follows. In Section 2 we present the data on industrial production and the real oil price for
each of the G-7 countries. We also investigate the time series properties of the data using unit root and stationarity tests.
In Section 3 we investigate whether the relationship between industrial production and the real oil price is nonlinear and
asymmetric and in doing so we use both slope-based tests and tests of the null hypothesis of symmetric impulse responses,
recently introduced by Kilian and Vigfusson (2011a). The final section briefly concludes the paper.

2. The data

We use monthly data for the G-7 countries and as in Kilian and Vigfusson (2011b) restrict our analysis to the post-1973
period, from 1974:1 to 2011:7. Following Bernanke, Gertler, & Watson (1997), Lee and Ni (2002), Hamilton and Herrera
(2004), Edelstein and Kilian (2009), Elder and Serletis (2011), and Rahman and Serletis (2011), for each country we use
the domestic industrial production index as a proxy variable for real output. Industrial production reflects manufacturing,
mining, and utilities, and represents about 20% of total output. It captures, however, economic activity that is directly
affected by oil prices.
We use the real price of oil, as many other studies do, including Mork (1989), Lee, Ni, & Ratti (1995), Elder and Serletis
(2010), Herrera, Lagalo, & Wada (2011a), and Kilian and Vigfusson (2011a). In particular, we follow Bredin, Elder, & Fountas
(2011) and for the United States we use the F.O.B. cost of crude oil imports (expressed in U.S. dollars per barrel) and divide
it by the U.S. consumer price index to get the real price of oil. For Canada, Japan, and the United Kingdom, we covert the
nominal price of oil (the F.O.B. oil price) to local currency and divide it by the domestic consumer price index to get the real
price of oil. We do the same for France, Germany, and Italy, over the period from 1974:1 to 2001:12, but to deal with the
introduction of the euro in 2002:1, for these three countries we use the irreversible parity rates with the euro to convert
to local currency and then divide by the domestic consumer price index to get the real price of oil over the period from
2002:1 to 2011:7. The F.O.B. cost of crude oil imports is from http://www.economagic.com/em-cgi/data.exe/doeme/cofmuus;
all the other series are from the Federal Reserve Economic Database (FRED), maintained by the Federal Reserve Bank of
St. Louis.
A battery of unit root and stationary tests are conducted in panel A of Table 1 in the natural logs of industrial produc-
tion and the real oil price for each country. In particular, we use the Augmented Dickey–Fuller (ADF) test [see Dickey and
Fuller, 1981] and the Dickey–Fuller GLS test [see Elliot, Rothenberg, & Stock, 1996], assuming both a constant and trend, to
determine whether the series have a unit root. The optimal lag length was taken to be the order selected by the Akaike
information criterion (AIC) plus 2 — see Pantula, Gonzalez-Farias, & Fuller (1994) for details regarding the advantages of
this rule for choosing the number of augmenting lags. Moreover, given that unit root tests have low power against trend
stationary alternatives, we also use the KPSS test [see Kwiatkowski, Phillips, Schmidt, & Shin 1992] to test the null hypoth-
esis of stationarity. As shown in panel A of Table 1, the null hypothesis of a unit root cannot be rejected at conventional
significance levels by both the ADF and DF-GLS test statistics. Moreover, the null hypothesis of stationarity can be rejected
at conventional significance levels by the KPSS test. We thus conclude that industrial production and the real oil price for
each country are nonstationary, or integrated of order one, I (1).
In panel B of Table 1 we repeat the unit root and stationarity tests using the first differences of the logs of the series.
Clearly, the null hypotheses of the ADF and DF-GLS tests are rejected and the null hypothesis of the KPSS test cannot be
rejected, suggesting that the logarithmic first differences are stationary, or integrated of order zero, I (0).
12 A. Serletis, K. Istiak / The Journal of Economic Asymmetries 10 (2013) 10–20

Table 1
Unit root and stationary tests.

Variable Test Decision

ADF DF-GLS KPSS
A. Logged levels
Industrial production
Canada −2.03 −2.05 0.623 I (1)
France −1.58 −1.71 0.612 I (1)
Germany −3.89 −2.89 0.147 I (1)
Italy −1.09 −1.30 1.092 I (1)
Japan −1.16 −1.24 1.636 I (1)
U.K. −0.65 −0.55 1.302 I (1)
U.S.A. −2.50 −2.29 0.597 I (1)
Real oil price
Canada −2.52 −2.59 1.372 I (1)
France −2.22 −2.25 1.323 I (1)
Germany −2.19 −2.26 1.291 I (1)
Italy −2.25 −2.31 1.376 I (1)
Japan −2.05 −2.02 1.529 I (1)
U.K. −1.97 −1.98 1.523 I (1)
U.S.A. −2.23 −2.32 1.462 I (1)

B. First differences of logs

Industrial production
Canada −8.06 −7.86 0.119 I (0)
France −29.10 −28.20 0.062 I (0)
Germany −27.47 −7.71 0.034 I (0)
Italy −28.19 −2.21 0.062 I (0)
Japan −12.47 −12.10 0.038 I (0)
U.K. −25.82 −25.85 0.072 I (0)
U.S.A. −7.33 −6.45 0.12 I (0)
Real oil price
Canada −12.18 −9.09 0.047 I (0)
France −13.04 −9.64 0.048 I (0)
Germany −12.89 −10.20 0.049 I (0)
Italy −12.83 −8.99 0.045 I (0)
Japan −12.45 −10.36 0.048 I (0)
U.K. −13.39 −10.12 0.046 I (0)
U.S.A. −12.45 −8.62 0.047 I (0)

Note: The 1% and 5% critical values are −3.98 and −3.42 for the ADF test, −3.48 and −2.89 for the DF-GLS test,
and 0.216 and 0.146 for the KPSS test, respectively.

3. Is the oil price–output relation asymmetric?

To test whether the relation between industrial production and the real oil price is nonlinear and asymmetric, we follow
the recent literature as it has been developed mostly by Hamilton (1996, 2003, 2011) and Kilian and Vigfusson (2011a,
2011b) — see, for example, Serletis and Elder (2011) for a brief review. In particular, we follow Hamilton (2003), let ot
denote the real oil price at time t, and define the net oil price increase (NOPI) over the previous 36 months, x̃t , as a
nonlinear function of the growth rate of the real oil price
 
x̃t = max 0, ln ot − max{ln ot −1 , ln ot −2 , ln ot −3 , . . . , ln ot −36 } (1)
in order to filter out increases in the price of oil that represent corrections for recent declines. It should be noted that
although Hamilton (2003) applied this transformation to the nominal price of oil, several other recent studies have applied
it to the real price of oil — see, for example, Alquist, Kilian, & Vigfusson (2010), Herrera et al. (2011a) and Kilian and
Vigfusson (2011a). Then we test the null hypothesis that the optimal one-period ahead forecast of the growth rate of
industrial production, denoted by yt , is linear in past values of the growth rate of the real oil price, xt , by estimating (by
ordinary least squares) the following predictive regression


p

p

p
yt = α0 + α j yt − j + β j xt − j + γ j x̃t − j + εt (2)
j =1 j =1 j =1

where α0 , α j , β j , and γ j are all parameters, εt is white noise, and x̃t is defined in (1). In (2), testing the joint null of linearity
and symmetry is equivalent to testing that the coefficients on x̃t are all equal to zero — that is, γ1 = γ2 = · · · = γ p = 0. If
the null hypothesis can be rejected, then the conclusion is that the relationship is nonlinear. Since the result of the test
could depend on the value of p in Eq. (2), we report results for both p = 12 [following the arguments of Hamilton, 2003;
Herrera et al., 2011a, and Kilian and Vigfusson, 2011b] and p = 18 [following the arguments of Kilian and Vigfusson, 2011a].
 A. Serletis, K. Istiak / The Journal of Economic Asymmetries 10 (2013) 10–20 13

Table 2
Slope-based tests of the null of linearity and symmetry with x̃t being the NOPI over the previous 36 months.

Country p-values based on

Eq. (2) Eq. (3) Eq. (4)
Lag length = 12
Canada 0.1393 0.0526 0.0988
France 0.2755 0.2455 0.0690
Germany 0.1219 0.1857 0.0725
Italy 0.3681 0.3710 0.1418
Japan 0.2582 0.3540 0.0834
U.K. 0.0867 0.1286 0.0314
U.S.A. 0.0002 0.0004 0.0001

Lag length = 18
Canada 0.0923 0.0422 0.0409
France 0.2253 0.1323 0.0762
Germany 0.2331 0.2969 0.3033
Italy 0.7921 0.7703 0.4478
Japan 0.3596 0.4447 0.3072
U.K. 0.1646 0.2080 0.0537
U.S.A. 0.0019 0.0031 0.0013

Table 3
Slope-based tests of the null of linearity and symmetry with x̃t being the NOPI over the previous 24 months.

Country p-values based on

Eq. (2) Eq. (3) Eq. (4)
Lag length = 12
Canada 0.0781 0.0426 0.1128
France 0.1556 0.1229 0.0518
Germany 0.1300 0.2264 0.1054
Italy 0.3729 0.3712 0.1725
Japan 0.2391 0.0548 0.0625
U.K. 0.0429 0.0677 0.0191
U.S.A. 0.0007 0.0012 0.0008

Lag length = 18
Canada 0.1607 0.0921 0.1056
France 0.1558 0.0741 0.0505
Germany 0.3283 0.4331 0.3952
Italy 0.8296 0.8107 0.4944
Japan 0.2967 0.0848 0.2460
U.K. 0.1506 0.1899 0.0677
U.S.A. 0.0097 0.0144 0.0041

We also use an alternative modified slope-based test, introduced by Kilian and Vigfusson (2011a), that includes additional
contemporaneous regressors in (2), as follows


p

p

p
yt = α0 + α j yt − j + β j xt − j + γ j x̃t − j + εt (3)
j =1 j =0 j =0

and test the null hypothesis of linearity and symmetry — in this case, γ0 = γ1 = · · · = γ p = 0.
Finally, in order to check the robustness of our result we use the following alternative model used by Hamilton (2003)


p

p
yt = α0 + α j yt − j + γ j x̃t − j + εt (4)
j =1 j =1

and test the null hypothesis of no effect of oil prices against the alternative of a nonlinear effect by testing the null that the
coefficients on x̃t are all equal to zero — in this case, γ1 = γ2 = · · · = γ p = 0.
We present the results of the symmetry tests in Table 2. As can be seen, among the G-7 countries only the United States
shows evidence of a nonlinear and asymmetric relationship between industrial production and the real oil price. For each
of the other countries — Canada, France, Germany, Italy, Japan, and the United Kingdom — we cannot reject the null of
symmetry and linearity at conventional significance levels. We also investigate the robustness of these results to alternative
measures of the net oil price increase and to the use of nominal instead of real oil prices. As can be seen in Tables 3 and 4,
the use of the net oil price increase over the previous 24 months and over the previous 48 months respectively, produces
14 A. Serletis, K. Istiak / The Journal of Economic Asymmetries 10 (2013) 10–20

Table 4
Slope-based tests of the null of linearity and symmetry with x̃t being the NOPI over the previous 48 months.

Country p-values based on

Eq. (2) Eq. (3) Eq. (4)
Lag length = 12
Canada 0.1529 0.0620 0.1045
France 0.3005 0.3011 0.0891
Germany 0.0984 0.1470 0.0295
Italy 0.2238 0.2449 0.0797
Japan 0.1652 0.2399 0.0381
U.K. 0.0475 0.0744 0.0143
U.S.A. 0.0001 0.0001 0.0000

Lag length = 18
Canada 0.1015 0.0495 0.0440
France 0.2836 0.1994 0.1286
Germany 0.1836 0.2389 0.1476
Italy 0.6311 0.6256 0.2862
Japan 0.2762 0.3522 0.1908
U.K. 0.0868 0.1150 0.0229
U.S.A. 0.0007 0.0013 0.0004

Table 5
Slope-based tests of the null of linearity and symmetry with nominal prices and x̃t being the NOPI over the
previous 36 months.

Country p-values based on

Eq. (2) Eq. (3) Eq. (4)
Lag length = 12
Canada 0.0288 0.0083 0.0241
France 0.2655 0.2311 0.0476
Germany 0.1208 0.1146 0.0892
Italy 0.6497 0.7220 0.4116
Japan 0.1763 0.2368 0.0715
U.K. 0.0502 0.0771 0.0322
U.S.A. 0.0006 0.0008 0.0003
Lag length = 18
Canada 0.0872 0.0339 0.0423
France 0.2851 0.1593 0.0556
Germany 0.2710 0.1845 0.3942
Italy 0.5507 0.6128 0.4582
Japan 0.3539 0.4094 0.3258
U.K. 0.1538 0.1964 0.0744
U.S.A. 0.0016 0.0024 0.0008

results consistent with those reported in Table 2. Also, we get qualitatively similar results when we use nominal oil prices
in Table 5 as those when we use real prices in Table 2.
Recently, Kilian and Vigfusson (2011a) question the use of slope-based tests to test for asymmetries in the response of
real output to oil price shocks. They propose a direct test of the null hypothesis of symmetric impulse responses to positive
and negative oil price shocks based on impulse response functions. Kilian and Vigfusson (2011a, p. 422) argue that “the
results of standard slope-based tests for asymmetry based on single-equation models are neither necessary nor sufficient
for judging the degree of asymmetry in the structural response functions, which is the question of ultimate interest to users
of these models.” In fact, as Kilian and Vigfusson (2011a, p. 436) put it, “statistically insignificant departures from symmetry
in the slopes may cause large and statistically significant asymmetries in the implied impulse response functions, given the
nonlinearity of these functions.”
In what follows, we use the Kilian and Vigfusson (2011a) test to test the null hypothesis of symmetric impulse responses
of industrial production to positive and negative oil price shocks. We focus on a version of the test in which x̃t is the
net real oil price increase over the previous 36 months and compute the impulse response functions by estimating (using
ordinary least squares) the following structural VAR


p

p
xt = α10 + β11 ( j )xt − j + β12 ( j ) yt − j + u 1t , (5)
j =1 j =1


p

p

p
yt = α20 + β21 ( j )xt − j + β22 ( j ) yt − j + δ21 ( j )x̃t − j + u 2t . (6)
j =0 j =1 j =0
 A. Serletis, K. Istiak / The Journal of Economic Asymmetries 10 (2013) 10–20 15

Fig. 1. The response of Canadian IP to one and two standard deviation, positive and negative oil price shocks.

Let the estimated coefficients, residuals, and residual standard deviations be ( β 1 , σ1 ) and (
u 1t ,  β 2 ,u 2t , 
σ2 ) for
Eqs. (5) and (6), respectively. The impulse response function is the difference between the implied path of indus-
trial production growth with and without a shock in the oil price growth rate. In our model, for a given history
{xt −1 , . . . , xt − p ; yt −1 , . . . , yt − p } ∈ Ω t , we consider a one time oil price shock in period t (that is, xt =  β 1 (1 Ω t ) + δ ,
where δ denotes the size of the shock; in our case, either δ =  σ1 or δ = 2σ1 ) and simulate the path of the industrial
production growth rate for the next h horizons. Similarly, for the same history we consider no oil price shock (that is,
xt = β 1 (1 Ω t ) + u 1t , where u 1t is drawn from the empirical distribution of u 1t — i.e., resampled from  u 1t ) and simulate
the industrial production growth rate path for the next the h horizons. The difference between the two paths of industrial
production growth constitutes the impulse response function

1 1
R R
I y (h, δ, Ω t ) = y 1(t +h),r − y 2(t +h),r
R R
r =1 r =1

where y 1(t +h),r is the industrial production growth rate with a shock in the real oil price after h horizons associated with
simulation number r and y 2(t +h),r is the industrial production growth rate without a shock in the real oil price after h hori-
zons associated with simulation number r. In fact, the distribution of the impulse response function can be represented as

1 1
R R
p
I y (h, δ, Ω t ) −→ y 1(t +h),r − y 2(t +h),r .
R R
r =1 r =1

We set R = 10,000 to get the impulse response function that converge in probability to the industrial production growth
rate gap generated by with and without shock. This impulse response function is called conditional as it is based on
the history Ω t . The unconditional impulse response function is generated by repeating the whole process for all possible
histories Ω t (t = 1, . . . , T ), and taking the mean over all the histories, as follows

1
T
I y (h, δ) = I y (h, δ, Ω t ).
T
t =1

The null hypothesis of symmetric impulse responses of yt to positive and negative real oil price growth rate shocks of the
same size is

H 0: I y (h, δ) = − I y (h, −δ) for h = 0, 1, . . . , H (7)

and tests whether the response of yt to a positive shock in the oil price growth rate of size δ is equal to the negative of
the response of yt to a negative shock in the oil price growth rate of the same size, −δ , for horizons h = 0, 1, . . . , H . For a
detailed discussion of the methodology, see Kilian and Vigfusson (2011a) and Herrera et al. (2011a).
Figs. 1 to 7 show the empirical responses of the industrial production growth rate to one and two standard deviation
positive and negative real oil price shocks, for each of the seven countries, in a model with 12 lags and including the
16 A. Serletis, K. Istiak / The Journal of Economic Asymmetries 10 (2013) 10–20

Fig. 2. The response of French IP to one and two standard deviation, positive and negative oil price shocks.

Fig. 3. The response of German IP to one and two standard deviation, positive and negative oil price shocks.

36 month net oil price increase. In particular, these figures plot the response of the industrial production growth rate to a
positive shock, I y (h, δ), and the negative of the response to a negative shock, − I y (h, −δ). The impulse responses are derived
for 7 months based on 10,000 simulations and 50 histories. In Table 6, we report p-values of the null hypothesis (7) and
since the test depends on the size of the shock, we report results for both small shocks (one standard deviation shocks,
δ = σ̂ ) and large shocks (two standard deviation shocks, δ = 2σ̂ ).
As can be seen in Table 6, in the case of France and the United Kingdom we cannot reject the null hypothesis of
symmetric impulse responses of the industrial production growth rate to positive and negative oil price shocks, for all
horizons and for both small and large shocks, consistent with the slope-based tests based on Eqs. (2), (3), and (4). For
Canada, Germany, Italy, and Japan the response of the industrial production growth rate is (in general) asymmetric at almost
all horizons for both small and large oil price shocks. Finally, for the United States, the response of the industrial production
growth rate is symmetric for all horizons for small shocks, but asymmetric for all horizons for large shocks, consistent with
the evidence reported for the United States by Kilian and Vigfusson (2011a) and Herrera et al. (2011a).
 A. Serletis, K. Istiak / The Journal of Economic Asymmetries 10 (2013) 10–20 17

Fig. 4. The response of Italian IP to one and two standard deviation, positive and negative oil price shocks.

Fig. 5. The response of Japanese IP to one and two standard deviation, positive and negative oil price shocks.

Our results are also broadly consistent with those reported by Herrera et al. (2011b) for France, the United Kingdom,
Canada, Germany, Japan, and the United States. The only exception is in the case of Italy for which we get asymmetric
responses whereas Herrera et al. (2011b) get symmetric responses. In this regard it should be noted that although Herrera
et al. (2011b) use the same methodology [that is, the Kilian and Vigfusson, 2011a impulse response functions test] and
a very similar data set as we do, this difference in the case of Italy could be attributed to the fact that we use 10,000
simulations whereas they only use 1000 simulations. We also use 50 past histories to calculate the unconditional impulse
response function whereas Herrera et al. (2011b) do not indicate how many past histories they considered.
Finally, it should be noted that for Canada and the United States, the values of the plotted impulse responses indicate
that when the oil price goes up industrial growth goes down (see Figs. 1 and 7, respectively). For the other countries,
however, the values of the plotted impulse responses are uniformly positive (see Figs. 3 to 6), meaning that when the oil
price goes up industrial growth goes up. This suggests that different countries respond differently to oil price shocks and
this could be attributed to price and wage rigidities, varieties of macroeconomic policies in the different countries, and the
nature of oil price shocks. In fact, as Kilian and Lewis (2011, p. 1066) put it in the case of the United States, “oil price shocks
18 A. Serletis, K. Istiak / The Journal of Economic Asymmetries 10 (2013) 10–20

Fig. 6. The response of U.K. IP to one and two standard deviation, positive and negative oil price shocks.

Fig. 7. The response of U.S. IP to one and two standard deviation, positive and negative oil price shocks.

are best viewed as symptoms of deeper structural shocks in oil markets. One would expect the Federal Reserve to respond
differently to oil price shocks associated with, say, unexpected booms in global demand, than oil supply disruptions. An
unexpected demand boom driven by the global business cycle, for example, will stimulate the US economy in the short run,
whereas an unanticipated oil supply disruption will not, calling for different policy responses depending on the composition
of the oil demand and oil supply shocks underlying the oil price shock.”
Our results are also consistent with those in a recent paper by Peersman and Van Robays (2012). They compare the
consequences of several types of oil shocks (oil supply shocks, oil demand shocks and oil-specific demand shocks) across a
set of industrialized countries that are structurally very diverse in the use of oil and other forms of energy in the economy.
They use a structural VAR and introduce a set of sign restrictions on global oil market variables to identify the underlying
shocks. They find that real GDP of net energy importers decreases and that of net oil exporters increases following a supply
shock. The authors also find that all countries show a significant short-run increase in real GDP following a demand shock
and that most countries show a temporary decline in real GDP following a demand specific shock.
 A. Serletis, K. Istiak / The Journal of Economic Asymmetries 10 (2013) 10–20 19

Table 6
p-values for H 0 : I y (h, δ) = − I y (h, −δ), h = 0, 1, . . . , 7.

h Canada France Germany Italy Japan U.K. U.S.A.


σ 2
σ 
σ 2
σ 
σ 2
σ 
σ 2
σ 
σ 2
σ 
σ 2
σ 
σ 2
σ
0 0.11 0.00 0.45 0.52 0.79 0.84 0.46 0.03 0.02 0.00 0.99 0.96 0.83 0.00
1 0.00 0.00 0.67 0.81 0.38 0.79 0.05 0.00 0.01 0.00 0.95 0.97 0.80 0.00
2 0.00 0.00 0.76 0.18 0.01 0.05 0.09 0.00 0.00 0.00 0.86 0.84 0.90 0.00
3 0.00 0.00 0.79 0.16 0.01 0.00 0.02 0.00 0.00 0.00 0.87 0.58 0.11 0.00
4 0.00 0.00 0.86 0.24 0.01 0.00 0.04 0.00 0.00 0.00 0.78 0.15 0.16 0.00
5 0.00 0.00 0.90 0.34 0.00 0.00 0.05 0.00 0.00 0.00 0.34 0.20 0.07 0.00
6 0.00 0.00 0.95 0.15 0.00 0.00 0.07 0.00 0.00 0.00 0.42 0.18 0.08 0.00
7 0.00 0.00 0.89 0.14 0.00 0.00 0.03 0.00 0.01 0.00 0.51 0.18 0.06 0.00

4. Conclusion

We have investigated the relationship between industrial production and the real price of oil for each of the G-7 countries
— Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States — using both slope-based tests and
the impulse response function test of Kilian and Vigfusson (2011a). Based on slope-based tests, we cannot reject the null
hypothesis of a symmetric relationship between industrial production and the real price of oil for each of Canada, France,
Germany, Italy, Japan, and the United Kingdom; only for the United States the null hypothesis of symmetry is rejected.
Based, however, on the Kilian and Vigfusson (2011a) impulse response function test, we find that for France and the United
Kingdom the response of the industrial production growth rate to positive and negative oil price shocks is symmetric, for
Canada, Germany, Italy, and Japan it is (in general) asymmetric for both small and large oil price shocks, and for the United
States it is symmetric for small shocks but asymmetric for large shocks.
This evidence is broadly consistent with that in Herrera et al. (2011b) and with the view that there are strong asym-
metries in the transmission of oil price shocks. It is also consistent with an alternative approach from the perspective of
uncertainty, as in Elder and Serletis (2009, 2010, 2011), Rahman and Serletis (2011, 2012), Bredin et al. (2011), and Pinno
and Serletis (2013).

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