Empirica (2015) 42:737746

DOI 10.1007/s10663-014-9274-y
ORIGINAL PAPER

Determining the asymmetric effects of oil price changes

on macroeconomic variables: a case study of Turkey
Yeliz Yalcin Cengiz Arikan Furkan Emirmahmutoglu

Published online: 18 October 2014

Springer Science+Business Media New York 2014

Abstract This paper aims to investigate the effects of unanticipated oil price
changes on the Turkish economy using quarterly gross domestic product (GDP) and
monthly consumer price index (CPI) and real exchange rate (RER) for the period
20022013. While the bulk of previous studies have employed the standard methodology without true data generating process knowledge, in this study asymmetric
Vector Autoregressive methodology proposed by Kilian and Vigfusson (Quant Econ
2(3): 419453, 2011) is used to analyze the asymmetric impact of oil prices on
macroeconomic aggregates. This method allows the researcher to investigate the
asymmetric effects of innovations in oil prices on variables without knowing data
generating process is linear or not. Empirical findings that, the oil prices changes
have asymmetric effects on CPI and RER at one standard deviation shocks in
different periods unlike GDP. These asymmetric effects are also statistically significant at 10 % significance level. Specifically, when oil price increases, CPI and
RER increases but GDP decreases in the long term.
Keywords

Oil price  Turkish economy  Asymmetric effect  VAR

Y. Yalcin  C. Arikan  F. Emirmahmutoglu (&)

Department of Econometrics, Gazi University, 06500 Ankara, Turkey
e-mail: furkan@gazi.edu.tr
URL: http://websitem.gazi.edu.tr/furkan
Y. Yalcin
e-mail: yyeliz@gazi.edu.tr
URL: http://websitem.gazi.edu.tr/yyeliz
C. Arikan
e-mail: C.Arikan@gtb.gov.tr
C. Arikan
Turkish Ministry of Customs and Trade, Ankara, Turkey

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JEL Classification

Empirica (2015) 42:737746

C01  C32  C34  C82

1 Introduction
The effects of changes in oil prices on economic activity receive a considerable
amount of attention by economists and policymakers. Most of the studies assume
that the relationship between oil prices and macroeconomic aggregates is linear and
therefore, estimate it by using standard linear Vector Autoregressive (VAR) model
and cointegration framework (for example Hamilton 1983; Gisser and Goodwin
1986; Bohi 1991 etc.). However, it has been found that the decreases in the oil
prices that take place after the second half of 1980s have smaller positive effects on
economic activity than predicted by usual linear models (Lardic and Mignon 2008).
Mork (1989) is the first study to provide the empirical evidence on asymmetric
effects1 of oil price shocks on output. After this influential work, the asymmetric
relationship between oil prices and economic aggregates has begun to gain
importance (for example Mork 1989, 1994; Mory 1993; Hamilton 1996, 2003;
Brown and Yucel 2002; Mehrara 2008; Kilian and Vigfusson 2011).
There is a vast literature to investigate different channels of the asymmetric effect
of oil prices on the macroeconomics variables. First, adjustment costs suggested by
Hamilton (1988) could lead to an asymmetric response to changing oil prices.
Rising (falling) oil prices hinder (stimulate) the economic activities directly.
However, the costs of adjusting to changing oil prices also slow down the economic
activities. Rising oil prices present two negative effects for the economic activities.
Falling oil prices present both negative and positive effects, which would tend to be
offsetting. (Brown and Yucel 2002). Second, the study by Ferderer (1996)
emphasizes that if oil price volatility has an adverse impact on the economic activity
and volatility also rises due to increases and decreases in oil price shock, then
uncertainty has the potential to explain asymmetry. Third, asymmetry may stems
from a monetary policy. The study by Bernanke et al. (1997) indicates that the
Federal Reserve Bank responds more aggressively to the rises in crude oil prices
than it does to falls in the U.S. economy (Herrera et al. 2014).
If the true relation is linear and one mistakenly estimates a nonlinear
specification, the resulting estimates are asymptotically biased (Kilian and
Vigfusson 2011). Moreover, if the true relation is nonlinear and one mistakenly
estimates a linear specification, the resulting estimates are asymptotically biased
(Hamilton 2003). In order to avoid either problem, Kilian and Vigfusson (2011)
suggest a new approach, which consists of including both linear and nonlinear
terms. The biggest advantage of their method is that the impulse responses are
consistent regardless of whether the data generating process is symmetric or
asymmetric. In other words, this method can be used without knowing the nature of
the true data generating process (DGP).
1

The asymmetric effect can be defined as increases and decreases in any variable do not have same
effect on any variable or economy.

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In this study in order to examine the asymmetric impacts of oil price fluctuations
on economic activity in Turkey, Kilian and Vigfussons (2011) asymmetric VAR
methodology is used. There are several underlying reasons why the Turkish
economy might be an important case study to examine the relationship between oil
prices and macroeconomic aggregates. First, since Turkey can only produce 10 %
of its oil demand; it is an important oil importing country when compared to other
OECD countries. Second, oil expenditure has a big part in GDP, as well as the
balance of international payment. Therefore, the changes in oil prices affect the
Turkish economy drastically. Third, in Turkey the biggest portion of special
consumption tax revenues comes from oil and natural gas so the changes in oil price
and exchange rates are crucial for policy makers (Alper and Torul 2010; Berument
et al. 2010).
Empirical evidence regarding the relationship between oil price and macroeconomic aggregates for Turkey is provided by a number of studies that employ
alternative estimation methods, i.e. different macroeconomic variables and for
different time periods. Even though most of these studies focus on the symmetric
relationship between oil prices and macroeconomic variables,2 the studies on the
asymmetric effects of oil price fluctuations on the Turkish economy are rather
limited. Alper and Torul (2010) examine the asymmetric effects of oil prices on the
manufacturing sector for the period 19902007, using VAR models. Their empirical
findings suggest that oil price increases affect several manufacturing sectors
asymmetrically, i.e. wood, furniture, chemical. Catik and Onder (2013)analyze the
asymmetric effects of oil prices on the economic activity for Turkey by using a
multivariate two-regime Threshold VAR model. Their results suggest that the
relationship between oil price changes and economic activity is nonlinear and shows
an asymmetric pattern.
The purpose of this study to investigate the asymmetric effects of oil price
changes on the macroeconomic aggregates including real gross domestic products,
consumer price index and exchange rate; by employing Kilian and Vigfussons
(2011) model. To this end, monthly and quarterly data are utilized for the Turkish
economy covering the period 20022013. This paper proceeds as follows.
Sections 2 and 3 presents methodology, and the data set and estimation results,
respectively. Conclusions are given in Sect. 4.

2 Methodology
In this study, Kilian and Vigfussons (2011) methodology is employed to examine
the relationship between oil price volatility and macroeconomic aggregates for
Turkey, since their model can be applied without knowing the nature of the DGP.
The VAR (p) model in Kilian and Vigfusson (2011) is:

There is a literature on the symmetric impacts of oil prices on macroeconomic aggregates for Turkey.
See, for example, Alper and Torul 2008; Berument and Tas c 2002; Diboglu and Kibritcioglu 2003;
zlale and Pekkurnaz 2010; Yaylali and Lebe 2012, Gokce 2013).
Kibritcioglu 2003; O

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Empirica (2015) 42:737746

Xt a10
Yt b10

p
X
i1
p
X

a1i Yti
b1i Yti

i1

p
X
i1
p
X
i1

a2i Xti e1t

b2i Xti

p
X

g2i Xti

e2t

i0

where the Xt and Yt is the percentage in oil price and the macroeconomic variable,
respectively, and et  WN 0; R. While the first equation is standard linear VAR, the
second equation includes both oil price increase and decrease effects by Xt and Xt .
Here Xt is a censored variable and can be defined as fallows
(
Xt ; Xt [ threshold value

Xt
2
0;
Xt  threshold value
where threshold value can be estimated by using Chan (1993) or can be taken as
zero. Equation (1) can be estimated by standard regression since the OLS residuals
of model (1) are uncorrelated (Kilian and Vigfusson 2011).
In order to test whether there is an asymmetric effect, Kilian and Vigfusson
(2011) has suggested two different methods:
2.1 Slope based test
The slope based test does not require the calculation of an impulse response and any
other properties. This test is based on statistical testing the censored variables in
model (1). The null hypothesis for the test:
H0 : g21;0    g21;p 0
This test has an asymptotic v2p1 distribution. Although slope based tests are
useful to determine the asymmetry, they do not give any idea about the direction and
level of the asymmetry.
2.2 Impulse response based tests
Generalized impulse response functions to both positive and negative oil price
shocks by using model (1) are calculated. The null hypothesis of test:
H0 : Iy h; d Iy h; d
where Iy h; d and Iy h; - d are responses of Yt at horizon h 1; 2; . . .; H to a
shock of d. This test has an asymptotic v2H1 distribution. Against the slope based
test, this test depends on the magnitude of shock. Therefore the impulse response
based test more relative and powerful than the slope based test (Kilian and Vigfusson 2009).

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3 Data and empirical results

In this study, quarterly data on the real gross domestic product (GDP), monthly data
for the consumer price index (CPI), the real effective exchange rate (RER) and the
brent oil price are used. The data cover the period 2002:01-2013:12.3 Since the
series have seasonal pattern, they are adjusted using the Tramo/Seats method. All
variables are used in logarithm form. The time series properties of all the variables
included in this study are examined using Augmented Dickey-Fuller (ADF, 1981)
and Phillips Perron (PP, 1988) unit root tests. The null hypothesis of the ADF and
PP tests for both the model with constant term and the one with a constant and trend
term is that the time series contains a unit root. The results of these tests are given in
Table 1.
According to unit root tests results, unit root null cannot be rejected at
conventional significance levels, at the 1 % significance level, for all variables.
Therefore, the first differences of all the variables are used when constructing the
VAR. After the censored variable is defined by replacing negative values of changes
in oil prices with zero, model (1) has been built-up for each macro-economic
variable and oil price in first differences, separately.4 Since Turkey has no impact on
oil price determination, lags of Yt are excluded from the first equation in model (1).
So the model becomes:
Xt a10
Yt b10

p
X
i1
p
X
i1

a2i Xti e1t

b1i Yti

p
X
i1

b2i Xti

p
X

g2i Xti

e2t

i0

In order to explore the effect of the positive oil price shocks on each macroeconomic aggregate, we calculated the generalized impulse responses. As discussed
in Koop et al. (1996) and Potter (2000), multivariate nonlinear models produce
impulse responses, which are history and shock dependent. Since the model (1) is
nonlinear, the generalized impulse responses are calculated using the procedure
given in Kilian and Vigfusson (2011). The procedure can be outlines as follows:
1.
2.

Xi information set, include all lagged values of Xt and Yt , is defined.

Given Xi two time path Xth and Yth are generated. When generating the first
time path, e1t value is set equal to a predetermined value d. The realizations of
e1;th h 1; 2; . . .; H are drawn from the marginal empirical distribution of e1t .
The realizations of e2;th h 0; 1; . . .; H are drawn independently from the
marginal distribution of e2t . When generating the second time path, all e1;th and
e2;th h 0; 1; . . .; H are drawn from their respective marginal distributions.

The data of brent oil price, gross domestic product and consumer price, real effective exchange rate are
obtained from International Energy Agency: http://www.iea.org., The Central Bank of the Republic of
Turkey: http://evds.tcmb.gov.tr/, respectively.

Akaike Information Criteria (AIC) is used to determine the optimal lag lengths of the model; the lag
order was 6 for GDP, 2 for CPI and 6 for RER.

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Table 1 The ADF and PP unit root test results

GDP

CPI

RER

Oil price

ADF
Level
Constant

-0.799

0.090

-2.218

-2.078

Constant and trend

-1.860

-1.943

-2.119

-2.339

-5.158***

-7.967***

-8.285***

-6.435***

First difference
Constant
PP
Level
Constant

-0.832

0.106

-2.343

-1.887

Constant and trend

-2.190

-1.780

-2.351

-3.118

-5.158***

-7.959***

-7.806***

-8.039***

First difference
Constant

*,**,*** Statistically significant at the 10, 5, 1 % level, respectively

3.
4.

Calculate the difference between the time paths for Yth h 0; 1; . . .; H

Average this difference across m = 500 repetitions of Steps 2 and 3 (Kilian and
Vigfusson 2011)

The impulse responses of each macro-economic aggregate when one standard

deviation positive shock is given to oil price are plotted out in the left panel of
Fig. 1. The dotted lines show the 95 % confidence intervals5 based on the
bootstrap simulation with 500 trials are calculated for responses to a positive
shock. The history dependent impulse responses are reported for 6 periods6 for
GDP and 12 periods for CPI and RER. In linear models, the impulse response to a
positive shock is by construction the mirror image of the response to a negative
shock of the same type and size (Hove 2012). Therefore, if there is an asymmetry,
positive and negative shocks are not mirror images of one another (Balke et al.
2002). To compare the positive shock and negative shock impulse responses, both
the responses to positive and the responses to negative shocks are given together
in the right panel of Fig. 1. The dotted line shows responses to a negative shock
and the straight line shows the responses to positive shock from the asymmetric
model.
The right panel of Fig. 1 reports the responses to a positive shock, Iy h; d,and the
responses to a negative shock, Iy h; d for GDP, CPI and RER. Although the
responses of GDP to a negative shock are nearly invisible, there are the small
absolute distance between the responses to a positive and a negative shock of the
same magnitude for CPI and RER. These results may provide an evidence for the
5

We also consider at 90 % confidence levels. However, our results are almost same at both confidence
levels.

Since the data of GDP is quarterly, the periods of impulse responses are taken for 1.5 year.

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Fig. 1 Effects of oil price shock, asymmetric model

existence of asymmetry for inflation and exchange rate. In order to test whether this
distance is statistically significant, in other words, whether there is an asymmetric
effect of oil price changes on GDP, CPI and RER, impulse response based tests are
used. Since the impulse response based test is more powerful, it is preferred in this
study. The p-values of the test H0 : Iy h; d Iy h; d for 8 periods are given in
Table 2.
When a one standard deviation shock is considered, the symmetry null
hypothesis cannot be rejected at 5 % significance level for all periods for GDP.
That is, there is no evidence against the symmetry null hypothesis for GDP in
response to a 1 standard deviation shock except the first period at 10 % significance
level. However, at all periods the null hypothesis can be rejected at 5 % significance
level for CPI and exchange rate. In other words, the impacts of oil price changes on
CPI and RER are asymmetric.

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Table 2 The impulse response based tests results

Period

GDP

CPI

RER

0.0903*

0.0000***

0.0007***

0.2303

0.0000***

0.0030***

0.2382

0.0000***

0.0024***

0.2833

0.0001***

0.0059***

0.2906

0.0002***

0.0119**

0.4014

0.0004***

0.0230**

0.4813

0.0002***

0.0401**

0.5784

0.0005***

0.0635*

p Values are based on the v2H1 distribution

*, **, *** Statistically significant at the 10, 5, 1 % level, respectively

According to the left panel of Fig. 1, although the changes in oil prices increase the
GDP growth, the cumulative effects of GDP decrease with the total effect of -0.3419
for 12 periods. This result is similar to the findings of Jones et al. (2004) and Lardic and
Mignon (2008). The impacts of oil price shock on CPI and RER are positive, which is
parallel to the literature (see Leblanc and Chinn 2004). According to the right panel of
Fig. 1, the oil price increases have larger impact on both GDP growth and inflation than
the oil price declines. However, the negative oil price shocks have larger effect on RER
than the positive oil price shocks. There are many reasons supporting these results for
Turkey as an oil importer country. Since oil is a necessary good for Turkey and the share
of oil in the budget is large, the negative oil price shocks have bigger impact on the
exchange rate. Also, the taxes imposed by the government on oil prices increased the
pump prices. This increase has further increased the exchange rate.

4 Conclusions
The aim of this paper is to estimate the asymmetric effects of oil price changes on
the macroeconomic variables for a small open economy like Turkey. In order to
investigate the asymmetric impact of oil prices, this study uses an asymmetric VAR
model that is proposed by Kilian and Vigfusson (2011) employing quarterly GDP,
and monthly CPI and RER data for the period 20022013. There is a wide
consensus that the effect of oil prices on macroeconomic aggregates is asymmetric.
Unlike the existing literature where the standard methodology is used without
knowing the true DGP, in this study the asymmetric impact of oil prices is
investigated utilizing an asymmetric VAR model. Empirical evidence from the
impulse responses suggests that although the impact of oil price changes on GDP is
symmetric after the first quarter, CPI and RER are affected asymmetrically for all
periods. The positive oil price shock has a smaller positive effect on CPI but larger
positive effect on RER. The GDP is also at first positively affected from a positive
oil price shock, but the overall cumulative effect is negative for 12 periods used in
this study.

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