Carnegie- Rochester Conference Series on Public Policy 28 (1988) 325368 North-Holland

ARE THE MACROECONOMICEFFECTS OF OIL-PRICE CHANGES SYMMETRIC?*

JOHN A. TATOM Federal Reserve Bank of St. and Washington University Louis

Oil of 1986,

prices giving

fell rise

in half to

between the end of 1985 and the second quarter debate over the effects declines examines of oil-price are simply issues. on the

a renewed the

changes generally the First, reverse the of

and whether oil price

effects

of oil-price This paper

increases. basis of as the oil-

these effects

theoretical reviewed effects. II, the

and

energy-price on competing

economy are energy price In declines matters

as well

evidence

hypotheses

about

Section to

comparability States

of shocks

recent is

oi 1

and

energy

price it

previous the decline

United recent is

examined.

Presumably, It is

whether the

shock is permanent permanent and,

or transitory. comparable of in

argued 1973is the

here that 74 and

therefore, The

to the the each This

1979-80 as shocks,

energy well; while the

price

shocks. States the whether this oil price

magnitude doubled

shock of

comparable previous also effects decline and, price of are

United

prices

recently of

has been halved. price shocks

section symmetric

discusses on the in oil

issue

energy section

have that

economy.

Finally,

emphasizes

the

recent States,

and energy prices the effects in of the

is not unprecedented such a shock are United States extent that fell than can be

in the United

therefore, of oil

not unknown. from the

The relative second quarter Thus, there the

and energy

1981 to the end of 1985 to a greater nearly In five years of experience

recently. used to

examine

asyrmnetry question. the third section, United empirical States estimates of the effects of energy

price

changes

on the

economy are presented.

These estimates

*Michael do not

Durbin

and reflect

Tom

Pollman those of System.

provided the Federal

able

research Reserve

assistance. Bank of St.

The Louis

views or the

expressed Board of

necessarily of the

Governors

Federal

Reserve

0 167

2231/88/$03.5001988

Elsevier

Science

Publishers

B.V.

(North-Holland)

update the earlier evidence presented in Tatom (1981, 1983b) and in Rasche and Tatom (1981). of recent price positive shocks. The fourth section turns to the international evidence. Unfortunately, other countries prices value. of oil available; have had little or no experience with declining relative and energy until 1986. a Data for that year single year would be are not yet of limited This section also provides tests of whether the effects declines differ from those associated with previous

moreover,

evidence

from

Thus, the production function estimates are incapable of providing

evidence on the asynaaetry question.

I. THE THEORY
Rasche and Tatom (1981) sunaaarize alternative channels of influence of an oil price shock. affected, that On the aggregate demand side, analysts focus on the in which domestic aggregate demand is to the left or right at an unchanged price "tax analysis" of the oil market is, shifted

level, due to a change in net imports of the "taxed" commodity. depends on the net export status of the country. sufficient shocks. Net exporters gain (lose) from an

In such an

analysis, the direction and extent of effects due to an oil price shock Countries that are self(decrease) in oil in oil, to a first approximation, are unaffected by oil price increase

prices, while the effect on net oil importers is the 0pposite.l The tax-analysis-based oil prices energy markets because oil aggregate demand approach focuses narrowly on An oil price or shock affects indirectly all is an input directly in the Second, and on net export effects.

production of other energy and because of interfuel substitution. not simply its net import or export quantity. is the suggestion that oil-exporting

the effects on the economy through supply depend on the total energy input, The greater flaw, however, benefit from higher countries

1 domestic effect includes The

HIckman terms due a to shift

(1984) of

breaks trade

this effect

aggregate that income.

demand

shift

for

an

oil

price income

increase and demand a net shift price

into export also shock.

reduces His policy

dcxnestic argument response why does for an ad

disposable for in an the

reduced due course, to

foreign a

aggregate face of an

discretionary begs the no Golub

oil shift

latter, the

of

question;

aggregate the hoc direction application

demand of of the the

initially? response analysis to

Moreover, or the aggregate exchange

argument demand rate

offers shift. of

a priori (1983) price

expectation provides shocks.

policy tax

effects

oil

326

aggregate demand and importing countries have reduced aggregate demand when oil prices rise, or conversely when they fall. Such a simple characterization ignores the productivity effects of oil price changes which are similar regardless of the trade-status of a country. Thus, the focus on

trade suggests that Canada benefited from the oil price rise in 1973-74 and that the United Kingdom should have witnessed a rise in aggregate demand, output, and productivity in 1979-81. evidence. Neither result is supported by the Similarly, the argument suggest that the United Kingdom would

have had relatively smaller output and productivity growth in 1986 compared with oil importers. The second basic channel is through aggregate supply and has come to be called a "price shock." rise. A standard It is taken for granted in is that, without aggregate restore much of the literaintervention, an raise prices; and Eventually, ture, often without explanation, that aggregate prices rise when oil prices explanation in the policy initial upward however, wage price. shift supply curve will the

output falls along a downward sloping aggregate demand curve. adjustments will

initial level of output

Such an analysis dominates texts; for example, see Hall and Taylor Prescott (1986) appears to share the view that oil

(1986, pp. 134-135).3

price shocks do not affect a country's production possibilities. The price shock effect on aggregate supply has the dominant impact, as prices rise in most analyses. scale econometric models and Hickman (1984) examines 14 large and small finds that they exhibit quite similar to the

aggregate price effects of an oil shock and that the models are linear and symmetric so that aggregate price level responses are proportional

2 followed price time price nominal percent). U.S.,

Rasche by shock

and the is

Tatom U.S.,

(1961) Canada, for prices

indicate France the were smaller U.S. the

that U.K., not than the U.S.

the and

largest Germany.

output The apply and time rose of than and energy

losses claim to other less. OPEC2 in from the

occurred that the

in recent

Japan, oil At the oil

comparable U.S. was oil

does

necessarily elsewhere At the

countries. Thus, l/1979 world down the

of

OPECl. increase oil

higher in the relative

OPEC1 to

relatively rose to more 1985. was

U.S. (173 prices

l/1961, (142 in the

prices From 1961

in the

percent) of oil

market sharply

moved

but

this

experience

not

shared

abroad.

Cordon disturbances

(1986, arising

p-7) from

apparently oil price

departs shocks to

from

even

this prices

analysis. in the nonoil

He

attributes part of the

aggregate economy.

sticky

377

extent of the oil price shock. The analysis of price

4 and oil price shocks, in

shocks, generally,

particular, often suffers from incomplete analysis. Analysts tend to ignore the fact that energy price shocks originate fected goods or services must be altered.5 are factors of production, the production supply conditions of the economy are altered. This is the emphasis in Rasche and Tatom (1977a) and their subsequent papers.6 shocks The alter fundamental incentives hypothesis to employ in this work energy is that energy price and alter optimal resources initially in changes in relative prices and that to make such shocks effective, the supply of afTo the extent that such goods possibilities and aggregate

methods of production. altered,

Energy-using capital is rendered obsolete in the

face of an energy price increase, optimal usage of the existing stock is labor resources are diverted to economize on energy employment, In capital The latter losses are manifested in lower real wages and production switches to less energy-intensive technologies. 7 and labor markets, productivity and, over time, in a reduced capital stock relative to labor.

4The number and a 5 of

linear energy

and

symmetric including in the

issues a price.

were 20-percent

addressed increase

by

comparing and/or

simulation decrease in the

outcomes price of

for oil

shocks increase

50-percent

Alternatively, through shocks is with type or

many transitory unimportant transitory tend natural to

transitory relative in theory.

price price

shocks changes.

occur

from The

quantity

shocks of

that price transitory shocks that

are or

transmitted quantity and a

characterization are typically

Quantity price with and output. changes,

shocks, while

however, permanent in

associated

relative be associated

macroeconomic relative prices

of also

cost-push potential

permanent

changes

affect

employment

6Hickman generally of the

(1984) there

discusses is such

this an

channel. effect, and that but

He

indicates estimates (1974) supply

that of

the it

participants were included

in in the a of fixed the Clark

the only shift supply effect

study six in of of

agreed 14 models.

formal

Phelps in (1985) on (1979). aggregate Mork

(1978) models provides supply. and Hall

Gordon treat a

implicitly shock as a

recognize shift in model

production resources. OPEC Bruno Gordon such recently, shock relative errors.

possibilities Harkness

another Other (1979). Tatcm by

explicit analyses Gisser (1985). Brunner. argue that

microeconomic of and The this channel

price-setting and Sachs

include

(1977). (1983),

Goodwin cycl ical

(1986). and and of

Klundert permanent

(1984). shocks

Jorgenson have been 8 from of Sachs

(1984a,b), explicitly (1985, pp.

and modeled

effects

of More price

Cukierman, the to effect their or

Meltrer a

(1983).

Bruno results price

252-254) bias. gross

raw-material

double-deflation materials affects

According domestic product

argument,

a
due

change to

in

the

value-added

measurement

7Baily incorporates the capital. interest

(1981) this rate

and effect

(1982) in a

emphasizes model of the of

the

capital

obsolescence Wilcox in the

argument. (1983)

Fischer successfully productivity

(1985) tested of

aggregate energy-induced

supply. decline

implications

marginal

328

effect reinforces the initial productivity loss and shows up as a temporary reduction in the growth of the capital stock and economic capacity.

In this
aggregate

view, aggregate demand shifts play no essential role. demand. More importantly, optimal policy

Shifts of are

in net exports are presumably offset by changes in other components responses

effectively limited or eliminated in this work because economic capacity is changed, and the economy adjusts to this change relatively quickly. cannot be of "restored" to adjustment to its original level through short-run demand management. dynamics Output aggregate

Moreover, tools of demand work slowly relative to the a supply shock so that the effects of price

shocks are largely completed before monetary and fiscal policy effects can have an impact on them. The Hickman (1984) study indicates that aggregate demand effects of oil shocks are minimal in 14 models of United States economy because "incipient" deterioration in the terms of trade from the increase in the price of oil imports is partly offset by the induced rise of export prices, and because the decline of world production does not impinge heavily on U.S. exports 1' (p. 91). Hickman also notes that most models have unitary price elasticities of aggregate demand so that "the relative magnitude of the output and price responses to an oil shock is similar across models, with big output reductions accompanying large price increases and vice versa" (p. 93). There are numerous other studies that have pointed to at least partial support for the aggregate supply hypothesis. These include Baily

(1981,
in

1982)

for the

capital obsolescence

component; several of the models

Hickman (1984) for the productivity evidence from abroad:

Mountain (1985)

for Canada; Mendis and Muelbauer (1984) for the United Kingdom; Hudson and Jorgenson (1978), Jorgenson (1984a,b), and Stockton and Struckmeyer (1986) for the United States; and Nunnenkamp (1982) for 31 developing and nine industrialized countries. Burbidge and Harrison Helliwell aggregate & a. supply (1985) analysis The cyclical evidence in Hamilton and (1986) present which evidence (1983) and the (1984) is consistent with the hypothesis as well. supporting using a model explicitly incorporates

329

putty-clay technology.8 for example.g

Nonetheless, the hypothesis has been rejected by (1980), Denison(l979, 1984), and Darby (1982),

some analysts: see Berndt

II. IS THE RECENT ENERGY PRICE SHOCK COMPARABLE WITH THOSE IN THE 197Os?
1

Prior studies do not indicate that oil price shocks have asymnetric effects. The evidence in Hickman (1984) is explicitly contrary to the asynaaetry hypothesis. did not decline." On the other hand, these models rely heavily on the The asynanetry argument has not been formally

experience in the 197Os, an experience in which real oil and energy prices detailed." Arguments for why the recent oil price decline will not yield

symmetric effects are discussed in this section.

aHelliwell
bundle in is and the one of capital other has

et -

al _and

(1986) energy they no is

find unity

that for

the the

elasticity U.S.,

of Canada,

substitution and the values Germany U.K.) of

between (p. whether the 88)

labor and that

and

even

countries virtually demand

study on (p.

(Italy. the fit

France, or the

Japan, parameter

and

this

elasticity production

effect

estimated

factor

equations

120).

Some energy labor) evidence account materials growth. and is energy largely price in in for

analysts shock

have did

concluded not lower See

that

Berndts or or to

analysis the

correctly

shows

that of

the capital

1973-74 (and Berndts

productivity Summers (1986)

marginal

productivity (1984), the for energy that in dataset, The

manufacturing. Table the use Most is a per of a 4 (p.

Denison show that actually of the

example. price the shock

71), through output (crude large price

which

purports energy for is (about in for of omits his in

did

not of

slowdown to gross

reduced accounts petroleum) share shock accounts

use, most

shows slowdown in this

contribution productivity Berndt price a decline notes,

labor as oil

energy relatively

materials, 60 percent) his of oil the price of

materials. indicates in to that same labor the

shock in

materials unit or of claims

data; most the the (1981) per

evidence decline shock effect the of for

that

materials Berndts value this of

labor the on

productivity. observed decline

Second, in the

computation existing

contribution capital and decline

output reach unit

would

substantially for for 10 role

raise Canadian of of the but

contribution. Again, in As mention labor in the

Berndt the

Watkins in while

conclusion accounts about trivial

manufacturing. the fall

materials energy the

two-thirds percent of

productivity, Berndt (1980). role

accounts

only the

decline. do not

however, of

authors

emphasize

energy

dominant

materials.

Of period than by oil

course, included in

real the

oil

prices

and of

energy most

prices but

did on

decline a steady were

through and cyclical

most moderate

of

the trend

postwar rather induced

estimation (1983).

models. indicates

abruptly. shocks

Hamilton before 1973.

however,

that

there

movements

Wharton possibility that

(1986) different

discusses policy

scxne responses

of

the could

arguments alter the

below, symmetry of

however, outcomes.

including

the

330

Is THE
If reason prices,

1986 SHOCK
to or expect

PERMANENT? little long-run Gately adjustment (1984) of methods that of there production, is little At least one be reversed.

the halving of oil prices in 1986 were temporary, there would be

employment.

indicates

agreement on the functioning of the oil market since 1973. for OPEC so that the recent declines are not likely to

perspective, however, indicates that the current price is probably optimal According to this view, decontrol of the United States crude oil market in early 1981 lowered the optimal price of the dominant firm in the oil market by raising the elasticity of demand for the dominant firm's oil. This view also indicates that OPEC2 largely was due to output changes associated with the Iran-Iraq war and, hence, that shock ultimately would be reversed-l2 In this view, the 1986 oil shock is not a temporary aberration but is a continuation of an adjustment that began five years earlier. Chart 1 shows the U.S. relative price of oil from 1974 to the end of 1986. oil. system. The prices are measured relative to 1985 business sector prices and The two prices differ until early 1981 due to the entitlement Note are for the average U.S. refiner acquisition cost of oil and for imported The imported price is included to indicate the world price.

that the real price of oil

in 1974-78 averaged about $19.50 per barrel OPEC2 sent the world price up from $22 of the domestic oil market occurred.

(1985 prices) and varied little. of 1981, when U.S. decontrol

per barrel at the end of 1978 to about $46 per barrel in the first quarter Subsequently, the world and domestic price of oil fell to about $27 per barrel by late 1985, a $17 to $19 per barrel decline, then further declined to about $13 per barrel (1985 prices) in 1986. Chart 1 indicates three central points: unprecedented; the decline began in 1981; (1) the 1986 decline is not (2) the recent decline level was of in

exceeded by the larger reductions that occurred from 1981 to the end of 1985; and (3) not until early 1986 were oil prices down to the 1974-78. Thus, the recent shock makes the 1981-86 magnitude to OPECZ, except for the timing difference. change comparable

This pattern shows

the plausibility of the permanent nature of the 1986 shock and indicates that the U.S. has at least five years of experience with a sharp decline in

12 this

The

analysis Also,

in

Ott see

and

Tatom

(1982a

and

b)

and

several

of

the

references

there

explain

argument.

Harkness

0985).

331

CHART

THE
PRICES)

RELATIVE

PRICE

OF OIL

DOLIARS )-

PER BARREL

(1985

1 * *

REF REF II rl OIL

t-*,1
\
I \

$ \

) -b \ 1

: I I , I I I I If I :
1
P

lc .

L
\ t;:

I--

I-i
,

75

76

77

78

-779

80

81

82 83

a5

a7

real oil prices. 13 Chart 2 shows the quarterly relative price of energy found by deflating the quarterly average producer price index for fuel, power, and related products by the business sector price deflator from present; the price has been indexed to 100 in 1972. and the 1981-86 decline, in terms of percentage changes. 1970 to the The chart shows the

same pattern as in Chart 1 and indicates the comparability of OPECl, OPECP, A better perspective on the permanence of the recent change comes from production and consumption developments since OPECP.

In 1973-79,

world oil to

production (and, roughly, consumption) ranged from about 59.7 million barrels per day (in 1973 and 1979, the figures were 31.0 and

62.5 million barrels per day, of which OPEC produced about 30.7 million 30.9, respectively). Subsequently, OPEC output fell, reaching only 16.1 million World production also fell to about 53 million

barrels per day in 1985. per day in 1985. Comparing

barrels per day in 1982-83 and only recovered to about 54 million barrels Thus, the market share of OPEC plumneted from about 50 fell about nine million The decline in the OPEC in rest-of-the-world percent during 1973-79 to about 30 percent of a smaller market in 1985. 1979 and 1985, world consumption barrels per day or about 14.5 percent, and non-OPEC production rose about six million barrels per day, or about 20 percent. share arose from both a relatively large production and a decrease in world demand. increase

OPEC, by late 1985, had not

adjusted fully to an increased elasticity of demand that had lowered their optimal price to levels below those that prevailed in 1974-79. Is THE CAPITAL oil OBSOLESCENCE prices rise, EFFECT ASYMMETRIC? capital is rendered obsolete, In the and/or One (2) demand is unaffected, scrapping

When and -

energy-using

unless (1) product prices adjust sufficiently, absence of these the stringent optimal requirements, employment

(3) other lower-cost methods of production are unavailable. increased

alterations in

of capital resources occurs.

30f

coursa,

since

the

initiating

factor

in OPEC2 has not

totally

disappeared,

further

per In 1978, Iran and Iraq produced 7.0 mi I I ion barrels This dropped to a low of 2.4 million barrels per day in 1981 and recovered to only about day. 4 million barrels per day at the end of 1985. Trehan (1986) presents an alternative view of downward movement can be expected. nominal dollar. oil; it oil prices, arguing that they are driven by movements in the exchange value of the But Trehans model explains only nominal price movements, given the relative price of does not account for the sharp nominal price changes associated with relative price

disturbances.

333

334

approach

to

obsolescence

emphasizes

"putty-clay"

technology,

where

the

capital stock embodies a technology that is premised on a set of expected factor and product prices. stock is no longer optimal. When factor prices change, the existing capital In this view, 9 relative factor price change Oil price shocks (or other

can make the existing capital stock obsolete. resources regardless of the direction of change. The principal role of putty-clay is in capital is often that

factor price shocks) reduce productivity by effectively destroying capital confused, short-run however. relative Its factor in

importance

indicating

proportions are

insensitive to factor price changes.

Thus, a change

energy prices, according to some analysts, affects resource employment only over time when capital can be changed. prices larger. But inelastic factor proportions a rise in energy simply makes the short-run output loss associated with substitution cannot offset a rise existing plant and equipment

Product price and output adjustments are larger when factor 14 in the price of one resource. The compared with the adjustment cost of

asymmetry result rests on the relative ease of shutting down the use of installing new capital or reemploying previously obsolete and idle capital, and this difference, to the extent it exists, is one of timing rather than substance. The putty-clay assumption does not yield differences in the response of the desired capital-labor or capital-energy ratios when the relative of energy changes. Neoclassical production and capital theory price

indicate that the response of these determinants of output and productivity are the same whether capital is putty-clay or not. have pp. symmetric 60-73), for effects on economic and there capacity, Factor price changes prices, and in production,

resource employment in the neoclassical model [see Rasche and Tatom (1981, example], are no qualitative proportions; see differences vintage capital models with fixed factor Ferguson (1969,

4As
qualitatively the

noted above, even by the putty-clay pressure that

the short-run assumption. the putty-clay

adjustment

to

an

oil

shock

is

not

affected

short-run

It is curious that some analysts appear to ignore assumption puts on reducing capacity utilization the effects of oil stock is adjusted. shocks work relatively product slowly prices How individual

through shutting down, arguing instead that over extended periods of time as the capital or the of the (1986) relative price argues factor level that can adjust costs specialized relatively changes in fixed prices.

as considerable evidence shows, in the face in the putty-clay case, is not typically addressed. Hami I ton resources can yield cyclical output losses for any change in

rapidly,

335

pp. 271-92), for example-l5 COST REDUCTIONS VERSUS COST INCREASES The intuition is that a factor price

Another argument is that firms respond differently to a factor price cut than to a factor price rise. increase forces adjustments, at least more quickly, because profitability and survival are threatened; adjustments to a factor price decline are more like opportunity costs that are hidden. altering decisions. A related argument is that adjustments to energy price shocks depend on the state of the economy, especially the state of the business cycle. OPEC1 and OPEC2 occurred when capacity utilization was relatively high and unemployment rates were relatively low. not been observed. weak. Incentives Since 1981, such conditions have are viewed plant limited interest as as and in in Thus, current incentives to expand production due to to expand the employment of energy-using That is, the pressures to change firms without production methods are less; profits rise for energy-using

factor price reductions or even to reduce product prices equipment, especially through new purchases, light of supposed weak demand for output. These views ignore maximizing are regarded

behavior or even minimal

achieving efficiency in the pursuit of firms' goals; moreover, they ignore the pressures of competition from other firms. best, differences shock. THE ADVERSE Another EFFECT view ON DOMESTIC adverse OIL WILL DOMINATE oil dominate the The importance of reductions First, the effects are in the timing of adjustments The arguments suggest, at to a lower energy price

is that

effects

on domestic

positive developments for other industries. the macroeconomy have been overstated, domestic oil

in oil exploration and development activity and oil-related loan losses for however. symmetric in that the market boomed following both OPEC1 and

5Neumann arise. turn, effects prices Suppose reduces reinforce fall.

and that

van oil

Hagen price supply, other

(1987) shocks, given when oil

provide up wages prices or

macro raise

model relative Then work

in

which price

another uncertainty and directions

symmetry that, price

can in shock oil

down.

aggregate each

and

prices. but

the in

uncertainty opposite

rise,

when

336

OPECE,

while

the

dominant

effects

were

on

other

producers.16

More

importantly, however, reductions in such activity in 1986 reflect short-run responses that would be expected to reverse as factor prices in exploration 17 adjust to the permanently lower oil price. Part of the confusion over this hypothesis may arise from the apparent relatively slow growth of employment This following the 1986 oil shock, earlier especially early in the year. result is consistent with

experience with oil price increases.

In the initial period of a shock, the Thus, when upward on the (1981, is more that

dominant effect is on productivity and supply, given product prices; with little price level adjustment, aggregate demand changes little. sales, resulting on in undesired and, inventory reductions that oil prices rise sharply and unexpectedly, desired output falls more than create pressure 1983b) readily One prices initially, downward cyclical pressure in Tatom What experience an

unemployment rate; see the unemployment rate discussion and more recent evidence in Ott and Tatom recalled of the is few apparently studies the adverse posit and cyclical test

(1986).

followed past oil price increases for a few quarters. that such asymnetric In his Farm hypothesis is the investigation of bank failures by Nelson (1986). on bank failure. He focuses on energy and farm commodity prices.

view, a sharp decline in price in one sector can have an asymnetric effect price changes appear to have asymnetric effects on bank failures from 195085; farm prices changes have a positive effect on the bank failure rate, but the price-increase effect is insignificant. fuel price decrease elasticity is over 30 Over the 1950-85 period, The for larger than that fuel price increases significantly raised the number of bank failures. times increases, however. These estimates are open to serious doubt because the failure rate was low over most of the sample period and rose sharply only at the end of the period when fuel prices also exhibited their only During an earlier sample period, increases and significant decreases declines. were more

&ka

analysts

contend

that

the U.S.

experience

in 1973-74

was not comparable

because

of

price controls on domestic crude oil. See Trehan (1987). for example. This ignores the 75.5 percent rise in domestic crude oil prices that occurred from Ill/1973 to ill/1974, despite the existence of controls, or the l%-percent increase from January 1979 to January 1981. a period of similar controls. markets, losses attention to oil-related sectors, loan losses often ignores the reductions

17 In financial in expected loan

in energy-intensive

including

agriculture.

337

symmetric; the elasticity for increases was -0.0457 (t = -1.17) larger in magnitude and more significant than for decreases, 0.0359 (t = 0.30). Moreover, the fuel price decrease effect accounts for about 227 failures per 15,000 banks in both of the out-of-sample years 1986 and 1987 (assuming fuel prices average the December 1986 level in 1987), up from a fuel price effect accounting for about 35 failures in 1985. The actual number of failures, however, only rose from 118 in 1985 to about 138 in 1986. SUMMARY The its 1986 oil and price shock appears to be a a comparable disregard variety of in magnitude, about market factors. oil permanence, and effects to previous oil price shocks. permanence effects arises from and developments over the past five years Uncertainty for other

Fortunately, there is evidence, especially from the past five years, that bears on this question.

III.

ESTIMATED

EFFECTS THERE

OF

U.S.

ENERGY

PRICE

SHOCKS

--

IS

EVIDENCE prices

OF ASYMMETRY? have 1983b)l oil been that falling for five years,

Since

oil

and

energy

empirical macroeconomic models can provide evidence on the issue. reduced-form model [see Tatom (1981, the short-run In effects of adverse purpose. oil shocks. THE MODEL The
(A

A simple for this

has been used to analyze shocks is used function

price

addition, similar attention

is paid to production

estimates that have been used to assess the productivity effects of adverse

Andersen-Jordan GNP could, in

equation (1968) be

expressed in growth rates or transitory, are but the

ln) is augmented to account for effects of the energy price changes. effects principle, statistically permanent reveal that significant effects transitory.

Such

estimates

Second, the price equation for the GNP deflator is a reduced-form equation in which the principal determinant of inflation is the rate of growth of the money stock Ml, but price controls and energy price shocks influence the level of prices and, temporarily, the inflation rate. growth rate,
A

The real GNP

lnX, is the difference

(A

IffiNP-A 1nP).

The GNP equation includes a strike measure, St, which is the change in 338

the quarterly average days lost due to strikes deflated by the civilian labor force: money (Ml) growth, A, federal expenditure growth, i, and are measured at annual rates GfiP (4OOA ln), as are changes in the relative and power deflated by the business fi and lags and head and tail constraints. sector The

price of energy, pe, where pe is the quarterly average producer price index for fuels, related products, price deflator. degree polynomials with five The coefficients on i are estimated using fourthpeare estimated cumulatively

coefficients on the current and six lags of

to indicate the impact of a change in pe on current and future GNP growth; after six quarters, GNP and its growth rate are unaffected. The price equation includes current and 20 lagged growth rates of the money stock; these coefficients are estimated using a third-degree polynomial with a tail constraint. price controls (Dl is one for II/1971 is one included quarters. for I/1973 an to I/1975) are using ordinary In addition, dummy variables for wageto I/1973) and decontrol periods (02 included. lag Energy price on pe over the effects past are four

distributed

OIL SHOCKS
The

AND GNP
has been estimated from I/1955 to III/1980 to provide to examine changes in

model

comparability with earlier estimates, and to III/1986 the effects.

For both periods and both equations in the model changes in The GNP equation estimated to III/1980

the lag length on energy price changes were examined, but these appeared to be the same as earlier estimates. is: Gi(P = 2.576 + 1.137 (3.23) (7.65) 4 z i=O Wt_i tit i + 0.017 (0.23) 4 E j=O w1 . i t-J t-j e

(1)

- 0.545 (-3.92)

St - 0.044 (-1.27)

A4

- 0.047 (-1.37)

A$_1

- 0.041 (-1.12)

Apt_2

-0.070 (-1.93)

APt_3

- 0.092

Apt_4

- 0.114

A%

(-2.63)

(-3.12)

i2= 0.50
II? R

S.E. = 3.17

D.W. = 2.09

equation fits the revised data slightly less well than earlier as the fell from 0.54 and the standard error rose from 2.96: t-statistics are 339

in parentheses here and below. 18 When the equation is estimated over the longer period ending in

111/1986,
since 1981.

adjustment

must be made for a systematic overprediction of GNP

is uncorrelated with the right-hand-side

This overprediction

variables in equation (l), or with a number of other factors that various analyst claim explain a fall in velocity growth since 1981.l the first quarter of 1981 is used for this purpose. for the period I/1955

An intercept

shift variable, 0812, a dummy variable that is zero until (and one after) The estimated equation

to III/1986

is:
4 I
j=O

4 GNP = 2.591 + 1.173 I: Wt_i Mt_i + 0.005 (0.07) (3.27) (8.38) i=O -0.518 - 5.928 0812 - 0.028 (-3.79) St (6.23) (-1.01) L$

w1
t-j

Et-j

- 0.054

(-1.83)

Apt_1

'e

- 0.034

(-1.09)

Apt_2

'e

- 0.083 (-2.61)

Apt_3

0.102 (-3.52)

Apt_4

0.087 (-2.98)

APt_5

*e

ii2 = 0 . 48

S.E. = 3.22

0-w. = 1.90

The overall fit of the equation is about the same as in equation (1); the pattern of energy price effects also looks about the same as in equation (1). Of course, this appearance could arise from the weight of the pre1980 energy price-GNP experience in both estimates.

*This constraint apparent A Pt_i in has

is on the no

the the

same sum of

specification ie coefficients version. equation of last In -0.110.

as

equation which The

(1.1) was (and in the 6 on

in

Tatan is)

(1981, supported

p. by from of future

l7), an the the GNP

except F-test, use of

for and iF_i

the was to is

unconstrained effect are effect on the the

change only in the (1981). In Tatom

the

estimation interpretation current and

estimate; a change term Tatom 0. in

coefficients growth instead

different. of the

They quarterly its -0.030, -0.106,

sum effect only. is -0.078. 0. The zero.

series the (1983b).

A 6:.
they

. . . . A py_5,
cumulative are -0.032,

iy_6
-0.028,

is
effects

ommitted are -0.036,

because -0.062, -0.068.

coefficient -0.033, -0.096,

comparable

See variable that earlier. because of could

Tatom that have

(1983a). the since

The

intercept error for the that can to

shift of the

used GNP here

here equation and

was

chosen from all of this

by the

finding permanent

the

shift shifts ending likely

minimized occurred

standard 1978 shown stability linked

period a trend be

number of period

sample type 1970-85

periods is for more

Christian0 trend-stationary activity rejected.

(1986)

has

velocity for

shift the of

rnodei measures

rejected while

a variety models

econanic be

money,

stability

difference-stationary

cannot

340

To test whether the transitory effects of energy price shocks on GNP have been different since energy prices -began fall_ing in 11/1981, the dumny variable, D812, is multiplied times energy prices adding six significant. terms to equation (2).
(bpt, . . . . opt_,-)

to examine whether This entails effects are added

since then have had a differential effect. None of the

The F-test for allowing the energy price coefficients to be 1O6 = 0.89, which is also not significant. Energy price Also, the

different is F5

declines have nbt had significant asynanetric effects on GNP. on GNP has not been altered by recent experience.

earlier conclusion that energy price shocks have only a transitory effect Another test utilizes all the information on the effects of a decline in-energy prices, including those before 11/1981. P; 2 0, when either variable Energy price increases, P; < 0; To test are treated separately from energy price decreases, has a nonzero value, the other _is zero. (pt... pt_5) $

whether these effects are symmetric, lags on the GNP equation instead of accelerations of

are added to

The test that the sum

of the increase-price and decrease-price variable coefficients equals zero is an F7, To4 = 1.45; the critical value is F7 level. rejected. A the third test involves a variant of Neumann and von Hagen's energy (1987) 11 relative price risk argument. relative price of quarters. The standard deviation of the logarithm of is computed over the current and past Thus, using this test, the asynmetr; lo4 = 2.10 at a 5 percent hypothesis again can be

The change in this standard deviation was added to equation (2), No additional term or

as were lags of it for up to four quarters earlier. is again no evidence of as-try. ENERGY PRICE

set of additional variables is significant at conventional levels, so there

SHOCKS AND

PRICES

The inflation equation estimated from I/1955 to III/1980 is:

20 Pt = -1.999 Dl + 1.641 02 + 1.115 c (-3.50) (27.84) i=O (2.88)

2 t-i M t-i (3)

*e 'e - 0.012 pt_l +(;.;I; p;_2 - 0.042 pt_3 +(;.;;f g-4 (0.77) . (-2.12) .

ii2 = 0 . 94

S.E. = 1.35 341

D.W. = 1.95

The fit of the equation during the earlier period is slightly worse than in earlier published estimates. changed, both in magnitude The energy price coefficients appear to have and timing. The sum of the energy price In addition,

coefficients drops to 0.050 from the earlier reported 0.066. data revisions, and now is largely at lag two.

more of the significant positive impact was at lags two and four before The negative third lag Recent GNP coefficient has been raised to exceed the fourth lag value's coefficient in magnitude, and the third lag value has become more significant. of energy price shocks on prices, even for the period before 1981. When the price equation is estimated to III/1986, *O Pt = -1.875 Dl + 1.530 D2 + 1.092 L (-3.24) (29.32) i=O (2.68) 'e +o.oo*Pt_I (0.21) 2 the results are: revisions appear to have altered the magnitude and the timing of the effect

- 4.466 D823 Wt-i Mt-i (-9.03)

(4)

+,;.@5; P;_* $O$ .

P;_3 '(y.;;; P;_4 .

ii* = 0 . 93

S.E. = 1.40

D.W. = 1.91

The (0,l) dummy variable D823 that is one beginning in the third quarter of 1982 was chosen for the same reason and in the same manner as D812 in the GNP equation (2) above. The fit of the equation and the coefficients are The sum of the energy price coefficients not different from equation (3).

is nearly the same as in equation (3). The first test of whether the energy price coefficients in the price equation have changed since 1981 involves adding the past four rates of to the equation (4) estimate. The sum change of energy prices time D812t_i recent effects. value = 2.47). equality

of these effects is 0.13 which indicates an increase in the magnitude of The F-statistic for the addition of these effects is only The second test involves dividing energy price increases The F-statistic for the price increase and energy price decrease effects is F4, II3 = 0.68, which is not significant at the 5 percent level (critical and decreases into separate independent variables. of energy

F4, II3 = 1.43, well below the 5 percent significance critical value. Finally, the measure of variability of the relative price of energy discussed above for nominal GNP growth was added to equation (4). this measure yielded no sequentially 342 significant term or Adding the contemporaneous change in the standard deviation or up to four lags of set of terms.

Thus, the hypothesis that falling energy prices since II/1981 three tests. OIL PRICE SHOCKS

have had a

significantly different effect on the price level can be rejected by all

AND REAL GNP

Since the effect of an energy

The effect of an oil price shock on short- (and long-) run output is determined from those on GNP and prices. price shock on the growth rate and level of GNP is zero after six quarters, the effect on output after that time is the inverse of that on the price level. The effect on the price level has not changed since 1980 (beyond the effects of data revisions), so that the permanent effect on output is unchanged. The timing and magnitude of the short-run output is unchanged. The timing and magnitude of the short-run output effect is not different either. The elasticity of the price level with respect to an energy price change is 0.050 to 0.058 according to equations (3) and (4), respectively. Thus, a 40-percent rise, such as OPECl, OPECZ, results in a permanent price level rise and output decline of about 2 to 2.3 percent; similarly, the same-size decline equal reduction in oil prices from in prices and rise IV/1985 to III/1986 output. results This in an in natural is down

slightly from the estimated effect of about 2.6 percent before the recent revisions. OIL PRICE SHOCKS AND PRODUCTIVITY

There was a discrepancy between the permanent output effect estimated by the method above and the larger elasticity estimated using an aggregate production function. But recent NIPA revisions have clarified the source Rasche and Tatom (1977b) but of that discrepancy and sharply reduced it.20 1967. energy annual

test a popular hypothesis that the trend growth of productivity declined in The hypothesis is rejected [and rejected again in Tatom (1981)], indicate a decline when the function, prices insignificant business trend-shift is included. X, the results in the size of the output elasticity of In the on stock sector output, is regressed

production

business

sector hours, ht. the product of the lagged net capital

201n price estimates fixed, price and of

Tatom energy the

(1981, f ram elasticity when

1983b). the

the reduced

long-run form in

elasticity model magnitude, is

of -0.067; -0.093, ratio

output in

with aggregate

respect

to

the

relative function ratio

production capital-labor adjust to the

is the

larger desired

holding is allowed

the to

-0.1118

capital-labor

energy

change.

343

(constant dollars) and Federal Reserve capacity utilization rate, kt, the relative price of energy, a constant, a trend and trend break in 1967, and a trend break in 1977 (which has been apparent estimate for the period 1948-80 is: In Xt = 0.299 + 0.690 In ht + 0.310 In kt - 0.053 p: (0.80) (13.18) (5.90) (-2.49) at least since

1981).

When recently revised NIPA data are used to estimate the equation, the

(5)

+ 0.019 t - 0.006 t67 - 0.008 t77 (10.97) (-3.41) (-1.96)

S.E. = 0.90% 0-W. = .

ii* = 0 . 97
The trend the from output

1.88

p = 0.25

shift, t67, now appears strongly significant, and t77 is also Using old NIPA data (I972 = 100) yields the same estimate of elasticity the 1967 of energy prices, however, when the formerly which Most of the previous discrepancy arose productivity, an omission

significant.

insignificant t67 term is included. ignoring shift biased upward price shocks. the estimate

in trend

of the permanent output elasticity of energy

The production function, estimated for the period 1948 to 1985, is: In Xt = 0.377 + 0.701 In ht + 0.299 In kt - 0.055 p: (1.15) (15.01) (6.41) (-3.10)

(6)

+ 0.019 t - 0.006 t67 - 0.006 t77 (11.57) (-3.87) (-3.09)

ii* = 0 . 97

S.E. = 0.86%

D.W. = 1.84

p = 0.28

There are no significant differences between the estimates in equations (5) and (6). energy Hence, it appears that the five additional years of data when declined sharply had no effect on the estimates. When prices

equation (6) is estimated so that the energy prices from indicates a smaller impact on output, but the

1981 to 1985 have

a differential impact on output, the difference is 0.0016 (t = 0.94), which difference is tiny and

344

insignificant.*l Whether to question. the reduction the in the trend output shift elasticity in 1977, the in the production output function approach is as large as the decline to 5.5 percent above is open Without short-run elasticity is 8 percent. Over short periods, such as the past ten years,

it is not possible to distinguish whether trend shifts are simply capturing residual effects due to energy price shocks, other transitory effects on productivity trends, or represent truly permanent changes in the trend. Identifying shifts in time trends is a problematical activity. differencing avoids many of the problems of identifying trend shifts. equation result is: AlnXt = 0.016 + 0.718 Aln ht + 0.282 Alnkt -0.081 Alnpt (6.75) (14.53) (5.70) (-3.53) R* = 0.85 S.E. = 1.12% D.W. = 1.81 FirstWhen

(6) is first-differenced without the trend-shift variables, the

(7)

The energy price coefficient rises in magnitude, but the standard error of the estimate rises 30 percent. When the same equation is estimated to 1980, the standard error is identical, and the energy price coefficient is slightly larger in magnitude, -0.100 (t = -4.03); the other coefficients change little, the constant is 0.018 (6.87), the hours coefficient is 0.744 (13.74), and the capital coefficient is 0.256 (4.74). Equation (7) can be used for the second and third tests used above for GNP and P. When the energy price increases and decreases are separated The Fis FT 33 = 3.67, ievel. is The not which into two variables, they do not add significantly to equation (7). test for the equality of the magnitude of the effects which price decrease coefficient has a coefficient of is below the critical value of 4.15 at the 5-percent 0.083

significant (t = 0.94, but the variability of this measure is low), while the price increase coefficient is -0.112 (-4.08). Changes in variability

21 capital desired given where their elasticity

The and

emphasis labor

above employment. ratio

is

on

the Rasche

output and

elasticity Tatoln due response and labor (1981, to an is in (5)

of p.

the 13,

relative and price by a

price

of

energy. that and to

given the that

elsewhere) rise percentage and this they

explain (decline). equal are used to the

capital-labor potential sk and s,

falls the of

(rises) long-run capital In

energy I arger value and

employment. are the shares

s,/s, ,
here for output

added, (6)

respective is 44.9

output and

elasticities. 42.6 percent.

equations

increment

respectively.

345

of

energy

prices The

were

also

tested of t =

in equation introduces when

(7).

The

three-period first-order the is is of not.

standard deviation of (ln pe) was added to this estimate, as well as a oneperiod lag. inclusion = 0.27, if 0.027
Aut_l AUK

significant this is

autocorrelation coefficient on insignificant. similar; whether its an

(p
Aot

1.97);

corrected,

(t = O-57), which positive and

has a wrong sign and (7), the result regardless is included or

When the coefficient

is added to equation correction

is

insignificant,

insignificant autocorrelation

Thus, all three of the tests reject the presence of significant asymmetry.

IV. THE FOREIGN EXPERIENCE

If energy price shocks affect productivity then comparable resources Rasche evidence are energy of domestic capital be available tradeable and

labor resources, countries, such an since

should

in other goods. in from

internationally (1981) the

Tests of asymnetric effects of energy price shocks could be replicated investigation. function and Tatom Canada, provided evidence United Kingdom, production estimates for

Germany,

France, and Japan supporting the productivity hypothesis. symmetry question. Unfortunately, investigation. available. obtain. In two developments limit the

An extension of

that work might provide additional evidence on the hypothesis and on the usefulness of such an

First, a key dataset used in the earlier study is no longer to

The estimation of production functions requires information on Rasche and Tatom (1981), the Wharton indices of capacity

the factor service flows from the stock of capital that are difficult utilization available. were have

in manufacturing were used as measures of such service flows Kingdom. There data are no longer and Canada, in while these Also, in the earlier for the United study various business sector measures Kingdom, for Germany, Helliwell -- al. (1986) et sector

for France, Germany, and the United constructed prepared a

manufacturing data were used for France and Japan. semiannual dataset the

business

countries plus Italy for the OECD, so these data are used here (referred to as OECD, below).22

**These provided by

data, Mr. Peter

updated Jarrett

and and

revised Mr. G.

from Salou

the of

original the OECO.

article,

were

kindly

and

quickly

346

The second, and more serious, problem for the purposes here is that the foreign data series exhibit little recent experience with falling The 1 Table energy prices and, hence, cannot shed light on the symmetry question. measures of the relative price of energy are given in Table 1. presents annual average data of the relative price of energy

measure

prepared from the OECII dataset; these data are available from 1963 for all countries but Japan and extend to 1983. Germany, table. Italy, and The relative Canada price Only begin of energy The data for the United States, not reported by in the the is constructed deflating in 1960 but are

nominal price of energy purchased by business by the deflator for business sector gross output. show declines Italy, Germany, Japan, and the United States and even from 1982 to 1983 (the only year of Thus, the data are of little or no use The column in parentheses for the after 1981,

decline for three of the countries) these declines for the four countries range from only 2.7 to 5.1 percent. in evaluating the symmetry hypothesis.23 above (indexed to 1970=100); discussed above. The disparate movements in the relative price of energy across countries require explanation. Consider the case of oil, which is priced in dollars in world markets. oil. The nominal foreign price of oil is e PO where e is the foreign currency price of the dollar and PO is the dollar price of If purchasing power parity holds, and P is the United States price Thus, the relative price of If other energy to oil level, then the foreign price level P* is e P. is priced

United States provides the business sector relative price of energy used it shows the larger magnitude of the decline

oil abroad, P;/P*, equals that in the United States, PO/P.

in dollars, or bears a constant relative relationship

prices in each country, the relative price of energy would tend to be the same across countries. The failure of purchasing power parity to hold is a These major reason for the disparate movements in Table 1. There are reasons to examine the foreign experience, however. include the effects of data revisions on the United States experience

discussed above, the available of six to eight more years data for foreign countries including the period of OPECZ, and the information now available

23The most other

decline countries growth and

in

the is in

relative one of U.S. in the

price

of

energy given other dollar

in in

the

U.S.

from (1986) and.

1980 for

to the

1985

and

rise

in in U.S.

reasons with of

Tatom

improvement improved

productivity competitiveness

the rise

compared the value

countries in

therefore, exchange.

the

the

international

347

TABLE

The

CIECXI

Measure

of

the

Business

Sector

Relative

Price

of

Energy

YEAR

U.S.A.

JAPAN

GERJ-IANY

FRANCE

U.K.

ITALY

CANADA

1963 1964 1965 1966 1967 I968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1970 1979 1980 i<Pl 1982 1983

109.2 107.7 105.9 103.8 102.6 100.2 97.8 100.0 102.3 102.4 104.9 138.6 148.3 151.9 157.2 156.4 168.2 204.2 216.4 215.0 209.3

(114.4) (110.1) (109.7) (108.6) 108.5) 102.6) 99.5) 100.0) 103.4) (102.4) (108.9) (153.9) (164.6) (168.3) (180.0) (179.1) (207.2) (267.8) (295.9) (278.8) (258.9) 124.5 117.0 114.1 110.1 105.7 100.0 90.7 93.0 92.2 123.7 134.2 145.7 146.5 138.5 125.6 200.0 214.5 230.6 223.4

129.1
124.3 120.7 120.2 119.0 114.5 109.0 100.0 105.1 100.5 102.9 124.1 I 28.6 38.8 36.5 33.9 152.4 168.0 186.5 200.6 190.3

106.2 105.7 106.9 98.2 96.1 93.7 94.2 100.0 99.0 105.8 97.6 104.4 131.5 128.7 133.2 137.6 133.1 160.9 181.4 188.6 189.7

122.9 118.2 116.1 112.1 III.5 112.0 107.6 100.0 97.5 95.6 92.0 101.3 114.4 120.3 127.6 129.0 121.2 131.2 138.0 140.8 140.5

125.0 120.2 116.3 114.3 III.8 112.6 106.4 100.0 loo.9 93.9 93.7 108.8 164.1 147.3 164.9 166.1 161 .O 206.7 225.2 243.5 234.4

114.7 110.9 107.6 105.0 102.5 102.4 100.9 100.0 104.6 104.3 104.1 112.3 113.9 124.6 162.2 174.2 165.7 166.3 192.3 207.3 215.8

*All energy price

data

were by

supplied deflating They have

by

the the been

OEUI PPI for indexed

except fuel, to

this power, 100 in

column and 1970.

which related

shows products

the

U.S. by the

relative business

price sector

of

found de+lator.

348

in the OECO data set. Others have examined the effects of energy price shocks on foreign output. For example, foreign manufacturing productivity has been examined study by Turner The (1987), stock recently in an International Monetary Fund (IMF) capital stock measures constructed by the IMF.

using U.S. Bureau of Labor Statistics data on output and hours, and gross IMF capital measures have been adjusted for a IO-percent loss in the capital stock due to OPEC1 and equally for the loss due to OPEC2.24 The IMF study of 10 countries shows that trend productivity growth losses. where The ranking of trend losses is in slowed sharply and significantly due to OPEC1 and OPEC2 after taking into account the 20-percent capital stock least affected country was consistent with the results in Rasche and Tatom (1981). Germany In particular, the productivity The most

manufacturing fell by 0.7 percent per year from 1973 to 1985.

affected countries were Japan and the Netherlands where trend productivity growth was lowered by 3 and 2.9 percent per year, respectively, over the same periods. Canada, France, Italy, and Belgium were estimated to have losses ranging from 2.2 to 2.6 percent per year. Kingdom, and Sweden, according to the IMF had trend productivity the United States,

Finally, the trend manufacturing growth rate slowed by about 1.2 percent in United estimates, again, beyond the productivity effects of the 20-percent capital 25 stock loss and any effect on incentives for resource accumulation. The OECD data on the business sector were prepared to develop supply-side of the OECD's macroeconomic model for seven countries. the most important advantages of this dataset are the consistency the of Two of

measurement across countries and the development of the energy purchases series. control whether Few studies of aggregate production have incorporated any explicit for energy employment nor have they been able to test directly productivity changes associated with energy price shocks arise

directly through changes in energy employment or through additional priceinduced changes in the efficiency of employment of existing capital and

24 to Artus

These

estimates

of

obsolescence

due

to

changes

in

the

relative

price

of

energy

are

due

(1984).

25Turner relative claims ignore because price that this the

(1987) of there issue relative

notes energy. is no the price

that since

the the to

results estimation

do

not

account ends in are at input the in

for 1985.

the

1986 Curiously,

decline

in

the he to only

period the

however, is period, able

reason U.S., of

believe energy is not

that

effects fell an

symmetric. end the of his

Turner sample

for

where energy

prices directly

estimation.

349

1abor resources.26

TRENDS
C~UNTRI

IN Es

PRODUCTIVITY

AND

FACTOR

PROPORTIONS

IN

SEVEN

Before turning to the estimates, a simple description of productivity and factor proportion trends is useful to highlight the general prediction of the hypothesis. OECD dataset. The Table 2 shows the growth rates of output per worker, in the seven countries 1973 and 1979 energy in the is period following the shocks capital per worker, and energy per worker

shown along with the 1965-73 trend in each variable. used because the OECD energy-use data end in 1983.

The 1979-83 period is The top panel shows the All The

slowdown in labor productivity from the 1965-73 trend during each period. Japan and Italy show the sharpest reductions in the 1973-79 period. the countries show even further reductions in the 1979-83 period. comparable six-year period is shown for output per worker. 79 pace for all the countries except the United

Even over this and United

period, the growth of output per worker slows from its relatively low 1973States Kingdom.27 The capital per worker growth rates also show reductions in 1973-79 compared with 1965-73. from output per worker the desired This ratio, of course, will show disparate behavior if real wages do not adjust due to a productivity In addition, it is not an indicator of when cyclical but movements in employment capital per Over the 1979-83 period, several of the the growth of ratio

shock; see Rasche and Tatom (1981). capital-labor depart from labor force growth. countries In these showed three worker accelerated

a further deceleration,

in the United States, Canada, and the United Kingdom.

countries, the growth rate exceeded the 1965-73 growth of

26tLeIliuelI genera

I Iy
CES

et al -* putty/semi-putty between function a

(1986)

do model

not of

directly production bundle and of labor.

address that capital

this

issue,

either. constant and CES tly

Theirelasticities labor. function the of

model

is of the

incorporates and the not in the Perloff expl energy inner ici

substitution inner and issue, energy estimates data,

vintage and

capital energy wel work implicitly the U.S. partially

Within capital

capital properties price effects inputs were

Within do

energy but and of

have energy so

CES

as

I.

The through

authors changes symmetric.

address cost

symmetry and include their

effects are in only

relative and (1981)

capital

the

Wachter show in that, energy

(1979) using

energy losses

and

Rasche accounted

and for

Tatom by

efficiency

variations

employment.

27The worker percent of for

revised 1.5 percent

data in

for

the

U.S. 0.1

used percent

in

Section for

II

show 0.3

growth percent

rates for

of 1979-63,

output and

per 0.8

1965-73,

1973-79.

1979-85,

350

Table 2 Annual Growth Rates

Output per Worker United States Canada Japan United Kingdom France Germany Italy Capital per Worker United States Canada Japan United Kingdom France Germany Italy Eneray per Worker United States Canada Japan United Kingdom France Germany Italy

1965-73 1.4% 9"-! 3:7 :?I 6:9

1973-79 0.2% 0.8 ::9" :*z 2:2

1979-83 -0.3% -0.0 2.1 :*: 1:3 -0.1

1979-85 0.2% 0.7 2.8 ::9" ::"6

2.5% 1:.:1 4:6 5.1 5.9 6.5

1.3% :-: 3:3 4.9 4.8 3.5

3.2 4.6 5.1 4.8 t-z 3:2

2.22 3.8' 5.3 4.02

i::

2.6

1.9% 11-9" 2:8 :-: 8:0

-0.5% -;*; -1:4 3.0 -:::

-4.8% -1.8 -6.4 -3.1 -3.3 -0.5 -5.4

'1967 to 1973; 1967 is the earliest available data. '1979 to 1984; 1984 is the latest available data.

351

capital per worker. In the bottom panel of Table 2 the growth rate of energy per worker is shown. The This growth rate slowed markedly in each country for each period. reductions in 1973-79 were in Japan and Italy, the two largest

countries with the largest reductions in the growth of output per worker. All of the countries showed larger reductions in the growth of energy per worker in the 1979-83 period. THE BUSINESS SECTOR ESTIMATES The

There are several disadvantages associated with the OECD dataset. do not begin until 1963 for many countries problem (1965 for Japan).

most obvious is that it ends in 1983 and the energy quantity and price data The second in factor is that it does not allow incorporation of variations

utilization, especially for capital, nor for changes in hours per worker. Helliwell -- al. point out the potential importance of this information and et make some progress in developing indirect estimates of an index of factor utilization; it would, of course, be more useful to have independent estimates of factor utilization and, more importantly, separate estimates for capital and labor. The OECD data on energy purchases by the business sector allows direct estimates of the contribution of energy. In one sense it is inappropriate or energy is an intermediate to include energy inputs in a value-added production function since valueadded is a function of labor and capital, input. There are at least two senses in which it is appropriate, however. First, it is simple arithmetic to transform each firm's production function for output into a value-added production function that includes the relative price of energy along with labor and capital.28 If energy inputs

are proportional to output and the relative price of energy, a value-added production function with energy input can be derived as well. The second sense, however, is more in line with a modeling approach that is increasingly example). a bundle where cormK)n (see These of Klundert inputs (1983) and the and Helliwell of capital e al. yield (1986), for capital models energy emphasize notion effective

physical

effective capital.

Such a view is suggestive of variations in the energy-

28 constant,

When the

the

relative

price, function be taken

or can into

simply omit

the such in

relative resources. the

share, In the

of

nonenergy of this

materials assumption,

is

production must

absence

nonenergy

materials

account

estimation.

352

capital ratio as a proxy for capital utilization, the flow of services from the capital stock.*' In the estimates to that on capital. below where energy is included on the right-hand side, no constraints are imposed on the relation of the energy coefficient

A constant return to scale restriction is imposed on

The discussion below

labor employment and the capital stock, however.30 shifts in time trends. to energy price shocks confused shocks, easily

focuses on first-difference estimates to reduce the influence of unknown The effects of permanent shifts in productivity due are, with especially shifts in for the some trend period rate following of the disembodied The the for the More is only

technical change. The semiannual business sector estimates are shown in Table 3. top equation a for the United States illustrates the superiority of business sector estimate above. longer sample period, and the

The advantages of those estimates include accounting directly in all level. and of

including 1983-85 data, recent 1986

variability in utilization of the capital stock and variations in hours per worker, data. the incorporation of range to at the has revisions

In the first equation in Table 3, the Durbin-Watson statistic is in

inconclusive the returns 5-percent little The energy significance power price estimate explanatory indicates

importantly, increasing

labor.

coefficient

significant at a 7-percent level. below for other countries. When becomes plausible

None of these properties characterize

the results in the section above but are cornnon problems in the estimates energy purchases are included in the estimation, the constant the capital the and labor coefficients coefficient stock take on more estimates, shown in and energy 3; the price (-0.030) becomes is not

insignificant,

insignificant (t=-1.02). variable is

The estimate without the constant or energy price capital coefficient

Table

29 The
control not for

inclusion the

of

energy of national appear they the

per

unit

of

capital flow of

as

measure from

of the

capital capital

utii energy

ization bundle rationale, the the

or

a is

quantity with explicitly when can is

effective income to take it.

services

inconsistent They

theory. the they view add

Helliwell that energy in

however. hand-side hand-side. and so the

et energy

al do not use this _f does not belong on to value-added such as on

rightleftbelow

because This practice

include

purchases direct

introduce not

spurious here.

correlations

estimates

those

followed

30The same, principal

fit

of if

the the is to

equations constant lower the

and

energy to

and scale

labor

elasticity

estimates apply to

are energy

essentially as well.

the The

however, effect

returns capital

restriction

stock

elasticity.

353

Table Business Sector

3 Functions'

Production

Dependent

Variable:

lnXt

country

constant

AI~K~

Aln~~

Alnp;

AlnEt

R2

S.E.

D.W.

Un i ted States

0.01 (4.11)

-0.323 (-1.92)

I .323 (7.85)

-0.061 (-I .89)

--

0.15

I .27$

1.58

--

0.264 -(I .76)

0.736 (4.90)

---

0.232 (3.80)

0.43

I .I6

1 .84

0.29
(I .79)

France

---

0.89 (2.93)

0.109 (1.58)

-0.124 C-3.40)

-_ --

0.72

l/33

2.09

0.36 (2.34)

--

0.661 (0.69)

0.339 (5.49)

--

0.299 (7.87)

0.86

0.92

2.09

--

Canada

0.010 (3.74) ---

0.055 (0.38)

0.945 (6.6)

-0.082 (-I .70)

---

0.06

1.35

1.38

0.290 (2.96)

0.70 (7.24)

---

0.250 (4.76)

0.45

I .26

I .59

Japan

--

0.575 (5.20)

0.425 (3.84)

---

0.17 (2.99) ---

0.82

1 .46

2.0

0.4 (2.33)

United Kingdom

0.009 (1.50) ---

0.14 (0.50)

0.859 (3.04)

-0.138 (-I .82)

0.08

I .63

1.73

--

0.558 (5.88)

0.442 (4.67)

---

0.342 (5.55)

0.60

1.30

.76

--

Germany

---

0.575 (5.22)

0.425 (3.86)

---

0.360 (4.3)

0.64

I .82

.63

0.12 (0.79)

Italy

0.008 (1.45) _--

0.489 (2.58)

0.51 (2.69

-0.129 -3.7

---

0.37

I .9

.75

--

0.515 (5.57)

0.485 (5.23)

---

0.444 (9.28)

0.84

I .26

.84

0.42 (2.90)

All

estimates on data

are

for

the

period For France

ending the United 1964.1,

in

the States, and

second

half

of and

1983, Germany,

the it

beginning is 1961.1,

period Italy

depends 1962.1,

availability. Kingdom 1963.2,

Canada, 1967.1.

United

Japan

354

significant at conventional levels, but at least it is positive. FRANCE The OECD data for France result in production function estimates in The resulting which the intercept is not significant and so is omitted. 31 When the energy price is equation estimates are those shown in Table 3. included with the energy quantity, it is not significant (t = -1.19). The second estimate for France in Table 3 indicates that energy price changes in France appear to operate relatively quickly and fully through changing factor proportions. CANADA The OLS estimate of the Canadian business sector production function in Table 3, including the energy price instead of quantity, shows positive first-order autocorrelation. and a marginally the improves with an insignificant capital energy purchases, but stock the coefficient, The estimate and When they constant insignificant energy inclusion of price coefficient.

energy price coefficient (-0.043, t=-0.88) become insignificant.

are omitted, the result is the second equation for Canada in Table 3.32 JAPAN The business sector production function estimates for Japan are similar in that, when energy purchases are included, they and the capital stock are strongly significant. and quantity insignificant data do not begin constant, They differ somewhat in that energy price until the 1965. The estimate, without an quantity of energy for the period

including

31A and the

level labor the

equation, coefficient constant is the level

without is to

energy. negative; scale large. does not

has the restriction

capital time

stock trend is

coefficient also

that significantly outcomes.

exceeds

unity

negative! The Adding energy energy remain

Relaxing price purchases significant.

returns relatively equation

does and

not

change

these

coefficient to

negative, alter these

strongly

significant. and energy

characteristics

prices

32The level. statistic little given 0.48, to in and

Durbin-Watson When rises 0.294 corrected to 1.90;

statistic for in 0.706 The

is insignificant

in

the

inconclusive first-order

range

at

percent the

significance Durbin-Watson change are the R* is

autocorrelation, labor. and energy

this (6.41).

case

the and

capital, 0.227 (3.771,

coefficients where t-statistics (1.19),

(2.671,

respectively, coefficient is

parentheses. standard error

first-order 1.25 percent.

autocorrelation

0.21

is

355

1965.2

to 1983.2 is shown in Table 3.33

THE UNITED
3, without significant relatively included, absolute

KINGDOM
energy, the constant at poor. the 8-percent and capital stock coefficients and the fit of the are not is is tin the

In the basic OLS production function for the United Kingdom in Table significant at conventional levels, the energy price coefficient level, When the quantity of energy purchased price of energy drops function to is only

equation not; the

by business

it is strongly significant value. The OLS

and energy prices are estimate

statistic for the relative

less than 0.3, without

production

insignificant constant or relative price of energy is shown in the table.

ITALY An OLS production function estimate using the OECD data for the period
1963.1 to 1983.2 is shown in the first equation for Italy. Unlike most of the other country estimates, autocorrelation is not a significant problem, the capital and labor coefficients are positive and significant, and the relative price of energy When the is strongly significant. quantity of energy The constant added is not to this significant. purchases is

equation it is strongly significant (0.418, t=7.72) and the relative price of energy is not (-0.030, t=-1.13). Italy. equation The estimate that includes energy and in Table The fit of the 3 for this not the relative price of energy is the second equation corrected for significant first-order is superior to the autocorrelation. estimate

An insignificant constant term has been omitted and the estimate is comparable that uses relative

price of energy.

THE SHARE OF ENERGY

IN BUSINESS

VALUE ADDED

IN SEVEN

COUNTRIES

The OECD dataset contains information related to the share of energy

in business sector cost and permits an assessment of whether these shares have changed. (1978.2), Table 4 shows these shares prior to OPEC1 as well (1973.1). in OPEC2 and at the end of the dataset (1983.2). intervening

33When price

this

equation C-0.04)

is is from

estimated insignificant in the

using

energy at

prices conventional (-0.075.

rather

than levels

quantity, (t=-1.23). but the

the

energy It is

elasticity different is only

significantly statistic

zero

OLS

version,

t=-2.17),

Durbin-Watson

1.02.

356

Table

Share

of

Energy

Cost

in

Business

Sector

Nominal

Value-Added

Intermediate 1973.

Intermediate 1978.2 Peak 1983.2

Peak

United

States

3.6%

(1977.2)

5.0%

4.8%

(1981.1)

6.6%

5.7%

Japan

4.1%

(1976.2)

6.0%

4.9%

(1981.2)

6.6%

5.7%

Canada

4.9%

(1978.1)

8.1%

8.1%

(1983.2)

9.6%

9.6%

Germany

6.0%

(1976.2)

7.8%

7.3%

(1982.1)10.4%

9.8%

France

3.8%

(1978.1)

4.8%

4.7%

(1980.2)

5.7%

5.6%

United

Kingdom

6.2%

(1977.1)

7.6%

7.0%

(1981.2)

7.3%

6.6%

Italy

4.0%

(1975.1)

6.0%

5.0%

(1982.2)

6.2%

5.8%

Table

Effects

of

Energy

Employment

Reductions

on

Output

(Based

on

Table

and

3)

1973-79 Annual Rate Growth output LOSS Annual Rate

1979-83 Growth output LOSS

1973-83 output LOSS

United

States

-0.6%

-3.1%

-1.6%

-4.4%

-7.3%

France

-0.6

-3.4

-2.5

-6.8

-9.5

Canada

-0.8

-4.7

-1.4

-4.0

-8.5

Japan

-1.9

-11.5

-3.0

-7.4

-18.0

United

Kingdom

-1.4

-7.8

-2.0

-5.7

-13.1

Germany

-1.8

-9.5

-2.6

-7.3

-16.1

Italy

-2.7

-13.8

-5.9

-15.4

-27.1

357

peaks. faster that,

These than by the

data

show produced of 1983,

that in at

in the

each

country sector shares United in that the share

energy following were Kingdom. the in of data

expenditures each shock,

rose
SO

income end

business the the

least, except

larger

than

before

OPEC1 or OPEC2 in every The shares among the highest. energy large in in impact 4

country

may be somewhat at each for world point,

surprising while

measure Germany the

for is

Japan

is

smallest

among the price of

Even allowing Germany of oil to

a smaller oil prices,

sensitivity these

relative

suggest

a relatively The shares not declined

shocks that

on output, the share the

prices, of energy

and productivity. in cost so that effects has the on this

Table

suggest in

appreciably price shock

any country not

(as of

end of

1983)

1986 energy account.

would

be expected

to yield

smaller

THE

DIRECT

EFFECTS

OF

OPEC

AND

OPEC 2 ON
be used Table to

BUSINESS

SECTOR

OUTPUT The energy effects energy 2 . 34 output growth on the of use elasticities in energy prior the in use to effects from in growth Table 3 can assess the the direct of OPEC to

changes per

on output. following the

2 shows

growth

worker of

1974, of the

OPEC 1 and following in energy the reductions the direct use growth in

An assessment growth and the annual can

reduction of

be found

product 3. Table period over

energy effects as the

elasticities rate of

Table for in the

5 shows in the Table two

each output largest

2 as well

overall effects Japan, States.

percentage show that

reductions Italy the had United reductions price countries.

periods.

The direct followed by

output France, growth

reductions, Canada, in (Table losses Table and

Germany,

Kingdom, in of output

the in

United Italy

The biggest the in relative two

5 are

and Japan; increases to two

energy

measures

1) show the in output

largest due These price of

these in

The smallest in same Canada

growth

reductions countries as in

energy

use were about and the larger

and the in than

United the

States.

showed France,

increase

relative or

energy

increases

Germany

the

United

34Manufacturing estimated output Turner except -1.21. Japan, results for series of for The followed are the the all were IMF. U.K., relative by of

sector the

production countries prepared prices the

functions except by the Italy ELS strongly large for and

using for the

the the

relative period 1961 stocks and

price to were

of 1985.

energy The

were hours by

also and

those

capital

provided in these

Anthony

Energy where

are

significant price

negative has a

estimates of effects only on These

relatively of United from effects States, the

coefficient showed United

t-statistic greatest and

rankings Canada, upon the

manufacturing Germany, the

the

Kingdom,

France.

available

request

author.

358

Kingdom, estimates, changes quantities but they

but of and

smaller course, ignore

losses

associated

with

energy-use

reductions. effects energy of

These energy-use

compound cyclical the in the of differential United the

and permanent movement of

prices

and

especially are suggestive

States

and Japan impacts of

between oil price

1981 and 1983, shocks across

relative

countries.35

V.
The decline price this shocks question of in oil prices in

CONCLUSION
1986 raised the question variables. the in which the the of whether oil

have symmetric presupposes oil price

effects a degree shocks

on macroeconomic of that certainty does on the not extent Several here is that and

Of course, channels of

concerning exist to

influence literature. price

economics recent have oil been shocks of other

The answer is but permanent the they

also or

depends

shock

transitory. view taken

approaches energy hence

discussed, matter labor

principal affect resources,

price

because and capital

economic or follow

capacity

productivity on In

aggregate from that factors oil that

supply. these suggest exist

The effects

macroeconomic microeconomic

variables arguments are

effects. that that prices. a decline the over

addition, shock longer is run

presented other world

recent the

1argel y permanent, are likely There tive fects. whose obsolete responses differences remainder of price These choice to are of further

M although depress

and energy suggest can have that

several a factor

arguments of

in

the

relaef-

production that

negative which

macroeconomic technologies

include was

the

argument on fall.

capital,

embodies

premised prices to cost

relatively Other

high arguments cost

energy concern reductions, sector

prices, slower or

becomes asymmetric

when energy by firms in the

increases of the prices

versus domestic decline.

response when oil

energy

asynmretric . vis a vis the

producers

35These output in loss

estimated per the the worker United United of the energy United (83%)

losses over the

in

output 1973-83 France,

due period and

to

energy relative

may to 40

appear

relatively trends in Italy, to loss for by 40 the in the is

large. about 45 20

but

the

previous percent

percent in The United is

Canada, in

Kingdom, States, use it

Germany, 12

and

percent data. the

Japan; direct States, larger

is

only for the

about about

percent

according of the

OECD Italy, direct

effect and in

accounts while in

two-thirds

Kingdom, and smaller

proportion Canada,

accounted and Japan

effect

Germany

France,

(about

percent).

359

The relative shock. productivity not have

United prices Evidence is

States of oil on

had

experienced before

a relatively 1986 that of suggests tests spending that of

large

decline

in to

the that and do

and energy the

was comparable prices, energy changing price

adjustments here that

output, shocks

presented

asymnetric in

effects.

Formal equations

energy

price function

coefficients reject the This asymmetric this the on question business energy-use in For

reduced-form hypothesis. looks but this the time. were

and an aggregate

production

asymmetry paper effects, at sector also

to data

the there

foreign are

experience too data limited

for to

evidence be of use

of for in

Nonetheless,

on aggregate business results stock and for sector in

production information

examined. surprisingly

The use of powerful capital

produces output of fully the

accounting labor

for

variations level. business otherwise extension understanding question

from

given countries, for

employment use in the are that to

most

seven accounts

accounting productivity shocks. be important

energy

sector

the

deviations The results in

that suggest

associated of these the

with

energy will

price

series

contributing and the

energy-capacity

relationship

generally

asylrmetry

in particular.

360

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