The relationship between oil prices and US economy revisited

ABSTRACT

The authors revisit the relationship between US economic growth and crude oil prices considering Industrial Production Index and West Texas Intermediate crude oil spot prices as respective proxies for a period spanning over January 1986 to June 2017. To capture the asymmetric and time-varying relationship, the authors employ maximum overlap discrete wavelet transform (MODWT)-based quantile regression (QR) analysis. Interestingly, MODWT-based QR analysis provides evidence of supply-driven link between crude oil prices and economic growth in the short run. However, in the medium to long run a demand-driven link is dominant. In addition, the QR results without MODWT also advocate a demand-driven link. Overall, the result of this study adds a new dimension to the literature on the relationship between crude oil prices and economic growth by focusing upon the time-frequency varying business cycle fluctuations.

KEYWORDS:

• Business cycle
• economic growth
• MODWT
• oil prices
• quantile regression

Notes

¹ This model has recently been used to model the dependence structure among the variables (Karlsson et al. 2017; Mensi et al. 2016).

² For a detailed discussion on methodology, refer the following studies (Lehkonen and Heimonen 2014; Li 2013; Mensi et al. 2016).

³ OLS and QR analysis on the logarithmically transformed returns series is defined as the base model.

⁴ OLS and QR analysis on the wavelet decomposed returns series is defined as the multiscale model.

⁵ The full result of the Wald test is available upon request to the authors.