Business Cycle State-Dependent Effects of Oil Price Uncertainty on the U.S. Economy

Abstract This paper investigates how oil price uncertainty shocks affect the U.S. economy asymmetrically during recessions and expansions, using quarterly data from 1969:Q1–2024:Q2. Using a Smooth-Transition Local Projections framework, we find robust evidence that uncertainty shocks significantly reduce output, raise unemployment, and dampen inflation more during recessions. In contrast, non-recessionary periods exhibit muted and shorter-lived effects. Monetary policy responds more aggressively when the economy is already weak, cutting interest rates further. Mechanism analysis reveals that these asymmetries operate through aggregate demand sensitivity, financial constraints, cost pass-through dynamics, and inflation expectations. These findings highlight the importance of accounting for state-dependent mechanisms when designing policies to mitigate the adverse impacts of oil price uncertainty shocks.