Energy Price Transmission into Real Economy. Simple Evidence of a Nexus
in: Lectures "WIFO-Extern"
Vortragsreihe "WIFO-Extern", Österreichisches Institut für Wirtschaftsforschung, Wien, 13.11.2013
The variation of energy prices has been a traditional source of shocks to the real economy. In many cases, this variation
has manifested in jumps in energy prices that were characterised by some persistence. From another perspective, energy price
volatility has historically been noted and its effects on real economy debated. Historically, the importance of the shocks
to the real economy has led them to be labelled as energy crises, as they were argued to have resulted in substantial changes
in real prices that induced changes in behaviour on the demand and supply sides of the many markets. This paper re-examines
evidence of such a linkage by considering the transmission of energy prices into soft commodity prices. This nexus lies within
the core of any real effects as softs include food-related commodities. The paper contributes to the literature by re-examining
this linkage with a close eye on the role played by structural breaks within a time series and by considering the question
of causality within a nonlinear framework. The paper finds that functional form is a critical specification that conditions
inference. Using linear forms, we find no cointegration between energy and food in the full sample under the maintained hypothesis
that there are no structural breaks. Using linear nonparametric methods, we examine the series for structural breaks and find
evidence of their importance. Based on subdivisions of the sample period as suggested by the structural break examination,
within the structural break intervals identified we find evidence of cointegration. We next reconsider the issue within the
context of nonlinear functional forms posing the question of whether evidence of structural breaks based on linear methods
follows from underlying nonlinearity. Our results confirm the importance of functional form specification and we find evidence
of nonlinear causality between energy and soft commodity prices.
Forschungsbereich:Makroökonomie und öffentliche Finanzen