The European Central Bank published a working paper introducing the Factor Bayesian Additive Regression Tree model, a nonlinear framework that allows the transmission of oil shocks to emerge from a large US macro-financial dataset without imposing a predetermined functional form. The analysis finds that adverse oil supply news shocks cause larger and more persistent contractions in real activity than the expansions generated by comparable favorable shocks, with pronounced effects on industrial production, financial conditions and equity prices. Adding financial variables produces sharper estimates of real-economy contractions and financial responses while reducing estimated inflation and inventory effects. Regional employment effects also vary substantially. Manufacturing-intensive states experience stronger contractions, while energy-producing states show partially offsetting dynamics. The main size-related nonlinearity occurs between very small and moderate oil-price movements, with larger shocks not consistently producing proportionally stronger effects.
European Central Bank2026-07-30
European Central Bank working paper finds adverse oil supply news shocks cause deeper and more persistent US contractions
A European Central Bank working paper finds that adverse oil supply news shocks cause stronger and more persistent US economic contractions than comparable favorable shocks generate expansions. Effects become economically meaningful as shocks move from small to moderate, but do not increase proportionally thereafter, while manufacturing-intensive states contract more than energy-producing states.