Energy market uncertainty and economic conditions at the global and US State levels

Abstract

This study evaluates the predictability of energy uncertainty in relation to economic activity across the global and the large open economy of the United States. Two distinct objectives guide the research: first, to explore the nexus between energy uncertainty and economic activity using various metrics, and second, to examine how well energy uncertainty enhances the forecast performance of economic activity across three different benchmark models, including a random walk with and without drift, and a historical average. The analysis incorporates two lag structures to capture additional dynamics, ensuring a comprehensive understanding of the relationship between energy uncertainty and economic activity. Results indicate that heightened energy uncertainty generally stifles economic activity, although this effect weakens over a longer lag structure. This finding is consistent for both in-sample and out-of-sample forecasts, and remains robust even when certain fundamentals are incorporated as controls, highlighting the strength of the research. These findings hold significant implications for both micro- and macroeconomic perspectives, underscoring the potential contribution of this research to the field of economics. The implications for policymakers are particularly noteworthy, as they provide valuable insights for decision-making in the energy sector.