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  • Ana María Herrera (a1)

This paper investigates the time delay in the transmission of oil price shocks using disaggregated manufacturing data on inventories and sales. VAR estimates indicate that industry-level inventories and sales respond faster to an oil price shock than aggregate gross domestic product, especially in industries that are energy-intensive. In response to an unexpected oil price increase, sales drop and inventories are accumulated. This leads to future reductions in production. We estimate a modified linear–quadratic inventory model to inquire whether the patterns observed in the VAR impulse responses are consistent with rational behavior by the firms. Estimation results suggest that three mechanisms play a role in the industry-level dynamics. First, oil prices act as a negative demand shock. Second, the shock catches manufacturers by surprise, resulting in higher-than-anticipated inventories. Third, because of their desire to smooth production, manufacturers deviate from the target level of inventories and spread the decline in production over various quarters; hence the delay in the response of aggregate output.

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Address correspondence to: Ana María Herrera, Department of Economics, Gatton College of Business and Economics, Lexington, KY 40506-0034, USA; e-mail:
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This research was supported by the NSF under Grant SES-003840 and was partially completed while visiting Harvard's Kennedy School of Government under a Repsol-YPF research fellowship. I am thankful to Jim Hamilton, Bill Hogan, Lutz Kilian, Valerie Ramey, and three anonymous referees, as well as participants at numerous conferences and seminars, for helpful comments and suggestions.

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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
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