Energy price uncertainty, energy intensity and firm investment

This paper examines the effect of energy price uncertainty on firm-level investment. An error correction model of capital stock adjustment is estimated with data on U.S. manufacturing firms. Higher energy price uncertainty is found to make firms more cautious by reducing the responsiveness of investment to sales growth. The result is robust to consideration of energy intensity by industry. The effect is greater for high growth firms. It must be emphasized that the direct effect of uncertainty is not estimated. Conditional variance of energy price is obtained from a GARCH model. Findings suggest that stability in energy prices would be conducive to greater stability in firm-level investment.

[1]  N. Bloom.  The Impact of Uncertainty Shocks , 2007 .

[2]  Christopher F. Baum,et al.  Firm Investment and Financial Frictions , 2006 .

[3]  S. Awerbuch,et al.  Exploiting the oil–GDP effect to support renewables deployment , 2006 .

[4]  Joel L. Horowitz,et al.  Bootstrap Critical Values for Tests Based on Generalized-Method-of-Moments Estimators , 1996 .

[5]  P. Beaudry,et al.  Monetary Instability, the Predictability of Prices, and the Allocation of Investment: An Empirical Investigation Using U.K. Panel Data , 2001 .

[6]  Ronald W. Masulis,et al.  Energy Shocks and Financial Markets , 1996 .

[7]  L. Kilian.  The Economic Effects of Energy Price Shocks , 2007 .

[8]  Douglas R. Bohi,et al.  On the macroeconomic effects of energy price shocks , 1991 .

[9]  Charles M. Jones,et al.  OIL AND THE STOCK MARKETS , 1996 .

[10]  Robert W. Faff,et al.  Does oil move equity prices? A global view , 2008 .

[11]  Perry Sadorsky,et al.  Modeling and forecasting petroleum futures volatility , 2006 .

[12]  L. Kilian,et al.  The Response of Business Fixed Investment to Changes in Energy Prices: A Test of Some Hypotheses about the Transmission of Energy Price Shocks , 2007 .

[13]  J. Peter Ferderer,et al.  Oil price volatility and the macroeconomy , 1996 .

[14]  Steven J. Davis,et al.  Sectoral Job Creation and Destruction Responses to Oil Price Changes , 1999 .

[15]  James D. Hamilton.  What is an Oil Shock? , 2000 .

[16]  Perry Sadorsky.  Risk factors in stock returns of Canadian oil and gas companies , 2001 .

[17]  Paul Leiby,et al.  Oil Price Shocks and the Macroeconomy: What Has Been Learned Since 1996 , 2004 .

[18]  Toni M. Whited,et al.  The Effect of Uncertainty on Investment: Some Stylized Facts , 1995 .

[19]  Perry Sadorsky.  Oil price shocks and stock market activity , 1999 .

[20]  Jungseok Park,et al.  Oil price shocks and stock markets in the U.S. and 13 European countries , 2008 .

[21]  Cetin Ciner,et al.  Energy Shocks and Financial Markets: Nonlinear Linkages , 2001 .

[22]  James D. Hamilton.  This is what happened to the oil price-macroeconomy relationship , 1996 .

[23]  Ronald A. Ratti,et al.  Monetary policy, oil price shocks, and the Japanese economy , 2001 .

[24]  M. Gronwald.  Large Oil Shocks and the US Economy: Infrequent Incidents with Large Effects , 2008 .

[25]  N. Bloom,et al.  Uncertainty and Investment Dynamics , 2006 .

[26]  David Roodman,et al.  A Note on the Theme of Too Many Instruments , 2008 .

[27]  Evangelia Papapetrou.  Oil price shocks, stock market, economic activity and employment in Greece ☆ , 2001 .

[28]  M. Arellano,et al.  Another look at the instrumental variable estimation of error-components models , 1995 .

[29]  Kiseok Lee,et al.  On the Dynamic Effects of Oil Price Shocks , 2002 .

[30]  Kiseok Lee,et al.  Oil Shocks and the Macroeconomy: The Role of Price Variability* , 1995 .

[31]  Knut Anton Mork,et al.  Oil and the Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results , 1989, Journal of Political Economy.

[32]  R. Pindyck.  Irreversibility, Uncertainty, and Investment , 1990 .

[33]  Stephen Bond,et al.  The Roles of Expected Profitability, Tobin's Q and Cash Flow in Econometric Models of Company Investment , 2004 .

[34]  R. Jiménez‐Rodríguez.  Oil Price Shocks and Real GDP Growth: Testing for Non-linearity , 2009 .

[35]  N. Bloom.  The dynamic effects of real options and irreversibility on investment and labour demand , 2000 .

[36]  Seema Narayan,et al.  Modelling oil price volatility , 2007 .

[37]  Jeffrey M. Wooldridge,et al.  Solutions Manual and Supplementary Materials for Econometric Analysis of Cross Section and Panel Data , 2003 .

[38]  D. R. Bohi.  Energy price shocks and macroeconomic performance , 1990 .

[39]  R. Terrell,et al.  The role of higher oil prices: A case of major developed countries , 2008 .

[40]  J. Cuñado,et al.  Oil prices, economic activity and inflation: evidence for some Asian countries , 2005 .

[41]  Matteo Manera,et al.  Oil Prices, Inflation and Interest Rates in a Structural Cointegrated VAR Model for the G-7 Countries , 2005 .

[42]  James D. Hamilton.  Oil and the Macroeconomy since World War II , 1983, Journal of Political Economy.

[43]  L. Kilian.  A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and Inflation in the G7 Countries , 2008 .