The Oil Price-Macroeconomy Relationship: Relevance and Stability

We will test the effect that different oil price transformations have on output in a linear regression and vector autoregressive model. Several tests are employed to analyze the significance between the transformations and output and the stability of the models. We find evidence that transformations which are based on a volatility-scaling have the strongest link with the output and are the most stable. Furthermore, our results provide evidence for an asymmetric oil-output relation and show a strong breakdown in this relation after 1973.