CHAPTER THREE

3.0 LITERATURE REVIEW

3.1 INTRODUCTION

This chapter is devoted to an exploration of the existing literature on concepts linked to the study. The
review provides a platform for interrogations of what scholars from different but related disciplines have
contributed to the issues of oil price, and industrial output and industrial employment. This will be done by
ways of theoretical reviews, methodological review, and empirical review.

3.2 THEORETICAL REVIEW

The theoretical review on the impact of oil price change on industrial output and employment gives a
conceptual framework to understand the key channels and mechanisms through which changes in oil price
affects the economy. Theories have shown the effects of changes in oil prices on key macroeconomic variables
that are crucial to economic growth, like industrial output and employment. The purpose of this theoretical
review is to provide a comprehensive understanding of the factors and mechanisms through which oil price
changes affects industrial output and employment. Several theories related to the topic have been reviewed by
scholars and would be examined.

3.2.1 THE THEORY OF DEMAND AND SUPPLY

A fundamental concept in economics is the theory of demand and supply, also referred to as the theory of
markets, which describes how buyers and sellers interact to determine prices and quantities in a market. It lays
the groundwork for comprehending market dynamics and how they affect how resources are allocated. The
relationship between changes in oil prices and their effects on industrial output and employment is examined in
this theoretical review. According to the theory, demand and supply interact in a competitive market to
determine a good’s price and quantity. The key components of the theory are Demand and Supply. Demand is
the quantity of a good or service that customers are ready and willing to purchase at a particular price during a
predetermined time frame. Price and quantity demanded have an inverse relationship, which reflects
consumers' willingness to buy more at lower prices and less at higher prices.
Supply is the quantity of a good or service that producers are willing and able to sell for a given
price, during a particular period. Price and quantity supplied have a positive relationship, which
reflects producers' incentives to produce more at higher prices to increase profits.
This review aims to provide a thorough understanding of the complex relationship between oil prices,
industrial output, and employment by examining the mechanisms by which changes in oil prices affect demand
and supply factors. Different industries exhibit varying sensitivities to oil price changes due to differences in
energy intensity and input costs. Energy-intensive sectors, such as manufacturing, transportation, and
 construction, tend to be more vulnerable to oil price fluctuations. Higher oil prices can directly impact
production costs, leading to reduced output and potential job cuts. Conversely, industries that rely less on oil or
have substitutes readily available may experience more limited effects.
Changes in oil prices have a wider impact on employment and industrial output than just one industry. Oil is
a crucial component of production and a major factor in determining the cost of transportation. As a result,
variations in oil prices may have wider macroeconomic effects. Increased inflationary pressures, for instance,
can reduce consumer purchasing power and have an impact on overall employment levels.
In conclusion, the relationship between changes in the price of oil, industrial output, and employment is
better understood considering the theory of demand and supply. Changes in production levels, employment,
and overall economic performance can result from fluctuations in oil prices because they can affect demand
and supply factors. This study emphasizes the significance of policymakers, industries, and stakeholders
understanding the implications of changes in oil prices and developing flexible strategies to reduce adverse
effects and foster economic resilience in the face of oil market dynamics.

3.2.2. THE THEORY OF INVESTMENT UNDER UNCERTAINTY

This theoretical review explores the theory of investment under uncertainty and its implications for
comprehending how changes in the price of oil affect industrial output, employment, and employment rates.
When businesses face uncertain future conditions, the theory of investment under uncertainty offers a
framework for examining investment decisions. This theory can assist in explaining how businesses evaluate
investment opportunities and make decisions that affect industrial output and employment in the context of
fluctuating oil prices. The theoretical foundations of investing in the face of uncertainty are examined in this
review along with how they apply to the economic effects of changes in oil prices.
According to the theory of investment under uncertainty, industries operate in a setting with a variety of
sources of uncertainty, such as market conditions, technological advancements, and governmental regulations.
Firms in these industries must evaluate these risks and make investment decisions that maximize expected
returns or utility. This brings me to what is called the Real Options Theory.

- Real Options Theory: By considering the flexibility of investment decisions, real options theory, a subfield
of theory of investment under uncertainty, expands the scope of the conventional net present value (NPV)
analysis. This framework is especially important for businesses that must deal with oil price fluctuations and
their effects on the overall economy.
Investment choices mediate how changes in the price of oil affect industrial output and employment. The
profitability and viability of investment projects can be affected by changes in oil prices, which can cause
changes in the investment plans of businesses. When oil prices increase, businesses in industries might cut
back on investment, which would lower industrial output and result in job losses. On the other hand, falling oil
prices could encourage spending, boost the economy, and create more jobs. Understanding how changes in the
price of oil affect these economic outcomes requires an understanding of the dynamics of investment under
uncertainty.
The relationship between changes in the price of oil, investment choices, industrial output, and employment
can be better understood using the theory of investment under uncertainty. We gain a deeper understanding of
how firms navigate oil price uncertainties and make investment decisions that shape the economic landscape
by incorporating the principles of investment under uncertainty. This review highlights the importance of
taking investment dynamics into account when analyzing the effects of changes in oil prices on industrial
output and employment, providing a basis for wise policy decisions and resilient economic growth.

3.2.3. BUSINESS CYCLE THEORY

The theory of business cycles aims to explain the cyclical patterns of growth and contraction in economic
activity. It aims to comprehend the changes over time that take place in output, employment, and other
macroeconomic variables. Gaining knowledge of business cycle theory can help you better understand how the
macroeconomic environment affects various industries, the firms in them, and employment. In this review, the
core ideas of the business cycle theory are examined along with how they apply to understanding how changes
in the price of oil affect industrial output and employment.
Phases of business cycles, such as expansions (booms) and contractions (busts), alternate. According to the
theory, there are four distinct economic phases: peak, recession, trough, and recovery. For evaluating how
changes in oil prices will affect industrial output and employment, it is essential to comprehend these phases.
Rising oil prices can have a variety of effects on industrial output and employment during economic
expansions. The severity of these effects is determined by the particulars of the industry and the general
economic environment. For industries that depend on oil as an input, higher oil prices can raise production
costs, which could result in decreased output and job losses.
However, higher oil prices can also encourage energy sector investment, generating employment
opportunities and increasing industrial output. Meanwhile, changes in oil prices during economic downturns
can make things worse. By lowering input costs and increasing consumer spending, falling oil prices can offer
some relief. However, the impact of changes in oil prices on industrial output and employment may be limited
if the contraction is caused by more general economic factors, such as decreased consumer demand or financial
instability.
Changes in the price of oil affect industrial output, employment, and other factors, but the relationship
between them is multidirectional and is also influenced by business cycle feedback mechanisms. For instance,
adjustments to industrial output and employment levels may influence oil demand, which in turn may affect oil
prices. Understanding these intricate interactions is essential to fully appreciating the effects of changing oil
prices on industrial output and employment. The impact of changes in oil prices on industrial output and
employment over the course of the cycle is better understood using business cycle theory. It emphasizes how
crucial it is to consider the larger economic context, industry-specific traits, and policy responses when
evaluating the effects of oil price fluctuations.
 This review emphasizes the need to include business cycle dynamics in analysis and decision-making
processes to effectively manage the effects of oil price changes on industrial output and employment.
3.2.4. THEORY OF COMPARATIVE ADVANTAGE
The theory of comparative advantage is examined in this theoretical review along with its implications for
comprehending how changes in the price of oil affect industrial output and employment. The comparative
advantage theory shows the advantages of trade and specialization based on variations in relative productivity
between nations or regions. This review aims to provide insights into how changes in oil prices affect the
allocation of resources, industrial output levels, and employment outcomes by analyzing the concept of
comparative advantage in the context of the oil market and it also examines the theoretical foundations of
comparative advantage and how it relates to comprehending how changes in the price of oil affect industrial
output and employment.
According to the theory of comparative advantage, nations or countries ought to focus on producing goods or
services for which they have a lower opportunity cost than rivals. Countries can increase their levels of
efficiency and overall economic welfare through trade by concentrating on their comparative advantages. The
comparative advantage of nations or regions with industries heavily dependent on oil can change because of
changes in oil prices. Oil-intensive industries may lose some of their competitive advantage because of higher
production costs. In contrast, lower oil prices may strengthen these industries' comparative advantage by
lowering input costs. According to the theory of comparative advantage, changes in oil prices may cause
resource allocation to change between industries.
Increased oil prices may encourage nations or regions to divert resources from oil-intensive industries to
those that rely on the commodity less heavily. The level of industrial output may be impacted by this resource
reallocation, with potential increases in other sectors and decreases in oil-intensive industries. Employment
patterns can also be impacted by changes in oil prices and ensuing changes in resource allocation. Oil-intensive
industries may see a decline in employment opportunities because of higher production costs, lower
profitability, or weaker demand. On the other hand, industries that gain from decreased oil prices and increased
comparative advantage might see an increase in employment. The magnitude of the changes in oil prices, the
size of the affected industries, and the labor market's flexibility will all influence overall employment.
The framework for comprehending how changes in oil prices affect industrial output and employment
patterns is provided by the theory of comparative advantage. This review emphasizes the significance of
modifying policies and strategies to maximize the advantages of comparative advantage despite changes in oil
prices by considering the impact on resource allocation and sectoral competitiveness. Effective policy
responses can promote economic resilience in the face of changing oil prices and help to reduce potential
negative effects on industrial output and employment.

3.2.5 THEORY OF EMPLOYMENT

 Theory of Employment is a theory of the decisions of employers to hire labour and of employees to offer
their services. It looks at the rationale behind the employment level of firms in an economy. John Maynard
Keynes defined it as a set of ideas that try to explain how jobs are created, levels of pay are decided. He argued
that economies don't naturally tend to full employment and that persistent unemployment can occur due to
inadequate demand. Keynes identified a concept known as the "multiplier effect," which states that an initial
increase in spending, say by the government, would lead to a greater-than-proportional increase in overall
economic activity, as the recipients, the public, of that spending would, in turn, spend a portion of their income.
This interlinked chain of spending stimulates production and employment. By introducing this concept,
Keynes laid the foundation for modern macroeconomic thought on employment. (Stirati, 2012).
The theory of employment examines how labor market function, focusing on the interplay between job
supply and demand. It explains how factors like economic conditions, wages, and workforce preferences
influence employment levels. (Brunner & Meltzer, 2008) A person in employment is a person aged 15 or over
who has done at least one hour's paid work in a week, or who is absent from work for certain reasons (annual
leave, sickness, maternity, etc.) and for a certain period of time. (International Labour Office - ILO).
Determinants of employment includes the size of the available workforce - which includes factors like
population growth, demographics, and workforce participation rates - Wage Levels, Industry-Specific Factors –
as each industry have different labor requirements - education and skills of the labor on display etc. (Aydiner-
Avsar & Onaran, 2010)
Industries closely tied to oil, such as oil extraction and transportation, are more directly impacted by oil price
changes. These industries may reduce operations and employment during periods of high oil prices. When oil
prices rise, it directly increases production costs for industries reliant on oil. Higher costs can lead to reduced
profit margins, prompting firms to cut back on production and potentially leading to job losses in those
industries.
In the context of this research, oil prices play a crucial role in determining the supply of labour and level of
employment. When oil prices changes, it affects the output of businesses in the industrial sector. For instance, a
rise in the price of oil will lead to firms in industry cutting short production, thereby reducing industrial output.
Maintaining profit levels would require firms to cut short workers, reducing the level of employment in
industry. The theory is crucial in the explanation of dynamics of the labor market, in response to oil price
changes and their implications for employment in industry.

3.2.6 THEORY OF PRODUCTION

The theory of production, also known as production theory or theory of the firm, is an economic concept that
explores how inputs (such as labor, capital, and raw materials) are transformed into outputs (goods and
services) by firms or producers. Production theory in economics refers to how businesses decide the quantities
of outputs to produce in response to demand. (Endurance & Nathan, 2021). The resources firms use in
production are called the factors of production, and they are also known as inputs. There are four factors,
which are land - free gift of nature and not only the soil itself. It includes the water, mountains, natural
resources, air. (Kurz & Salvadori, 2000).
Second is Labour is referred to as the mental or physical exertion directed to produce goods or services.
Third is Capital, the part of wealth of an individual or community which is used for further production of
wealth. Entrepreneur, the fourth factor of production, mobilizes all the factors of production i.e. Land, Labour
and Capital, combines in the right proportion, initiates the process of production & bears risk involved in it.
(Kurz & Salvadori, 2000).
The theory of production introduces the concept of a production function, which describes the relationship
between inputs (labor, capital, etc.) and outputs (goods and services) in a production process. A typical
production function is represented as Q = f(L, K, M, ...), where Q is the output, L is labor input, K is capital
input, and M represents other inputs. Since oil could be part of materials used in production process, then oil
price will affect output. (Ezenekwe, 2020.)
Different industries have varying levels of sensitivity to oil price changes. Industries directly related to oil,
such as petroleum refining, petrochemicals, and transportation, are more directly impacted by oil price
fluctuations. Oil as an input, being a function of oil prices, affects production level of firms. An increase in an
input price can result in decreased production. Production is any economic activity which is directed to the
satisfaction of the wants of the people. Production means creation or addition of utility.
This review explains the value of the theory of production in understanding the dynamics of the oil market
and its effect on the industrial sector. It considers the relationships between inputs, which oil is a part of, and
outputs, which can play a role in explaining the impact of oil price changes on industrial output.

3.2.7. GAME THEORY

The basics of game theory are introduced in this review along with how it relates to understanding how
changes in oil prices affect industrial output and employment. Using a mathematical framework called game
theory, researchers can examine how rational decision-makers interact strategically. This review aims to
provide insights into how game theory can shed light on the complex dynamics and decision-making processes
that arise from oil price fluctuations by examining strategic interactions among market participants in the
context of the oil market.
In situations where decisions are influenced by the actions and reactions of others, game theory examines
how people or other entities make decisions. It considers strategic interactions in which the results of one
participant's choice are influenced by those of other participants. Game theory can shed light on the actions and
choices made by oil producers, consumers, and other market participants in the context of the oil market.
Market participants may act strategically in response to changes in the price of oil.
Oil-producing nations may be compelled to reduce production when oil prices rise just to profit from higher
prices, which could result in a decrease in oil supply and higher oil prices. In contrast, oil-consuming industries
 might look for alternate energy sources or implement conservation strategies to lessen the effects of rising
prices. A framework for analyzing and comprehending these tactical responses is provided by game theory.
- Nash Equilibrium: A crucial idea in game theory is the concept of Nash equilibrium, which denotes a situation
in which no player can unilaterally change their outcome by adopting a new strategy. Nash equilibrium can
provide insight into the stability of market conditions and the dynamics of supply and demand in the context of
changes in the price of oil. Based on their expectations of how other participants will behave, participants in
the oil market adjust their production levels and investment choices, resulting in equilibrium outcomes.
Game theory considers how uncertainty affects decision-making. Changes in the price of oil create uncertainty
in the market, which has an impact on plans for production, employment levels, and investment decisions.
Uncertainty-based game theory models can shed light on how market players modify their tactics in response
to unpredictably changing oil prices. For examining how changes in oil prices affect industrial output and
employment, game theory provides a useful framework.
This review highlights the value of game theory in comprehending the complex dynamics of the oil market
and its effects on the larger economy by considering strategic interactions, equilibrium results, market power,
uncertainty, and policy implications. A better understanding of the effects of changes in oil prices on industrial
output and employment can be achieved by applying game theory insights to policy decisions.

3.2.8. EFFICIENCY WAGE THEORY

According to the efficiency wage theory, businesses may decide to raise wages above what the market will
bear just to increase worker productivity, lower employee churn, and recruit better candidates. The basics of
efficiency wage theory are explained in this review, which also looks at how it relates to the effects of changing
oil prices on employment and industrial output. This review aims to provide insights into how efficiency wage
theory affects the relationship between oil price fluctuations and industrial output levels as well as employment
outcomes by examining the role of wages in promoting worker productivity and labor market dynamics.
According to the efficiency wage theory, paying higher wages can encourage employees to perform better by
giving them an incentive to put forth more effort and boost job satisfaction. According to the theory, increased
worker productivity results in higher wages, which in turn can have a positive impact on the level of industrial
output. As a result, variations in oil prices, which may have an impact on businesses' capacity to pay higher
wages, may have indirect impact on industrial output by affecting worker productivity. The efficiency wage
theory takes labor market dynamics into account when determining wages.
Oil price increases could result in higher production costs, which could put pressure on businesses to cut
back on hiring or wages. To preserve employee morale, job satisfaction, and productivity, businesses that
adhere to the efficiency wage theory may, however, resist wage reductions. Instead of wage reductions, this
may result in changes to employment levels, which could influence both industrial output and employment
outcomes.
 According to the efficiency wage theory, employees who are paid more than what the market will bear
(market-clearing wage) may be more committed to their employers, resulting in lower turnover and related
costs for businesses. Increased economic uncertainty brought on by higher oil prices may make efficiency
wage considerations even more crucial in the context of oil price changes. Because firms in industries are
interested in retaining skilled workers, lowering turnover, and maintaining productivity levels, businesses may
be more disposed to maintain higher wages.
Depending on the industry, the theory's explanation of the correlation between shifts in the price of oil and
changes in industrial output and employment may differ. When oil prices rise, industries that depend heavily on
it, like transportation or energy production, may experience difficulties. When oil prices are volatile, a
company's capacity to maintain higher wages and employee retention may have an impact on that company's
ability to maintain industrial output levels.
The efficiency wage theory offers a structure for understanding how wages affect worker productivity, the
dynamics of the labor market, and their implications for employment and industrial output. This review
emphasizes the significance of efficiency wage considerations in the context of changes in the price of oil by
considering the role of wages in fostering worker motivation, decreasing turnover, and increasing productivity.
Efficiency wage theory insights can be used to inform strategies that promote productivity, job satisfaction, and
stability despite oil price fluctuations, influencing industrial output and employment outcomes.

3.3. METHODOLOGICAL REVIEW

A methodological review is referred to when the methods and approaches employed in earlier studies on a
particular subject or field are critically analyzed. It concentrates on analyzing the benefits and drawbacks of the
methodologies used and judging the general excellence and dependability of the research done.

3.3.1. VECTOR AUTOREGRESSION (VAR) MODEL

The Vector Autoregression (VAR) model is a statistical model used to examine the dynamic relationships
between various time series variables. It is a generalization of the autoregressive model (AR) that enables the
modeling of numerous interdependent variables at once. VAR models are helpful for conducting impulse
response analysis, investigating the short-term dynamics of the system, and examining the interdependencies
between variables (like for example, The bivariate VAR model is a useful tool for examining the dynamics and
interactions between two variables, capturing their combined behavior, and investigating the immediate and
long-term effects of shocks.).
Exogenous variables and more complex dynamics, such as structural breaks or non-linear relationships, can
be incorporated into VAR models through extension.
- Structural Vector Autoregression (SVAR) Model: This is statistical model called used to examine the changing
dynamic relationships between numerous variables. It is a development of Vector Autoregression (VAR), a
model that explains the relationships among various time series variables. The main variation is that while
SVAR models offer a framework for identifying structural relationships and comprehending the causal effects
of exogenous shocks on the system, VAR models concentrate on the statistical relationships between variables
without explicitly identifying causality.
In the Bayesian approach to SVAR modeling, the model parameters are given a prior distribution, and the
posterior distribution is updated considering the observed data. In contrast to conventional methods, this
method incorporates prior knowledge and permits the incorporation of uncertainty in the parameter estimates,
allowing for a more flexible and robust estimation. In conclusion, the Bayesian SVAR model offers a versatile
and potent framework for exploring the dynamic interactions between variables, estimating structural shocks,
and simulating economic policy.
- Heteroskedastic Vector Autoregression (HVAR) Model : For Its ability to that enables the modeling of time-
varying volatility or heteroskedasticity in the residuals or error terms of the VAR equations, it is an extension
of the conventional Vector Autoregression (VAR) model. It allows for more accurate modeling of the
conditional variance dynamics by considering the possibility that the variables' volatility may change over
time. In a typical VAR model, homoskedasticity—or constant variance—of the error terms is assumed. The
assumption of constant variance may not apply to real-world data, and heteroskedasticity can have an impact
on the model's estimation, inference, and forecasting. Although, by explicitly modeling the conditional
variance of the error terms, HVAR models deal with this problem.

[Link] AUTOREGRESSIVE CONDITIONAL HETEROSKEDASTICITY (GARCH)

MODEL
Generalized Autoregressive conditional Heteroskedasticity (GARCH) is a statistical model known as
frequently used to capture the heteroskedasticity (variance that varies over time) and time-varying volatility in
time series data. It is an extension of the Autoregressive Conditional Heteroskedasticity (ARCH) model. In
financial econometrics, where volatility is a key factor in asset pricing, risk management, and forecasting,
GARCH models are frequently used in the analysis. They aid in capturing both the persistence of volatility
shocks over time and the clustering of high or low volatility periods.
Maximum likelihood estimation is typically used in GARCH models estimation, where the parameters are
selected to increase the likelihood of seeing the data given the model. The GARCH model can be used to
predict future volatility, evaluate risk, and examine the effects of shocks on time series once it has been
estimated. Additionally, it entails capturing asymmetric reactions to positive and negative shocks and modeling
long memory in volatility.
- (Generalized Autoregressive Conditional Heteroskedasticity) Model with DECO (Dynamic EquiCorrelation):
An enhancement to the standard GARCH model, the GJR-GARCH model enables the modeling of asymmetric
effects on volatility. It expresses the notion that the conditional variance of a financial variable may be affected
differently by positive and negative shocks. On the other hand, the DECO strategy focuses on simulating asset
correlations that change over time. It acknowledges that there is a temporal and cyclical variation in the
correlation between financial variables. The volatility dynamics and the correlation dynamics in financial time
series data can be modelled simultaneously by combining the GJR-GARCH model with the DECO approach.
This makes it possible to comprehend risks and the joint behavior of assets more thoroughly.
- DCC-GARCH (Dynamic Conditional Correlation GARCH) model: DCC-GARCH is an econometric
framework called used to calculate and project time-varying conditional correlations between several variables.
The dynamics of asset returns, volatility, and correlation can be studied using this method, which is frequently
used in finance and macroeconomics. The dynamic conditional correlation between assets is included in the
DCC-GARCH model, an expansion of the basic GARCH model. The conditional correlation between assets is
modeled separately from the conditional variances in the DCC-GARCH model. It acknowledges that the
correlation between assets can fluctuate and is not fixed over time. It is crucial to keep in mind that the DCC-
GARCH model relies on the assumption that the conditional variances and correlations are adequate to capture
the data's dynamics. The DCC-GARCH framework does not explicitly model other factors or macroeconomic
variables, so they must be considered separately if necessary.
- Univariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model: It is an econometric
framework in which the conditional variance and volatility of a single time series are modeled and predicted.
By utilizing methods like maximum likelihood estimation, the GARCH model enables the estimation of the
model's parameters. Once the model has been estimated, it can be used to predict future volatility using the
estimated parameters along with the squared residuals and conditional variances' observed values. For better
risk assessment and decision-making, it offers a flexible framework for capturing the time-varying volatility
patterns seen in financial data.

3.3.3. MAXIMUM OVERLAP DISCRETE WAVELET TRANSFORM AND QUANTILE REGRESSION

Maximum Overlap Discrete Wavelet Transform is used to analyze and separate time series data into its
various frequency components. It is a variation on the discrete wavelet transform (DWT) that offers better
resolution and more time-frequency localization. It can be used to examine and break down economic time
series, identify various frequency components, and investigate the relationships between them. The redundant
filter bank used by MODWT enables the greatest possible overlap between adjacent wavelet coefficients. This
helps to represent the original time series more precisely, particularly at higher frequencies, and prevents the
aliasing issue that can arise in non-redundant DWT.
Quantile regression can be used in estimating the median, lower quantiles (like the 25th percentile), and
upper quantiles (like the 75th percentile). By capturing the conditional distribution of the response variable
rather than just concentrating on the mean, it offers a more thorough understanding of the relationship between
the variables.
Quantile regression is particularly advantageous when examining the heterogeneous effects of predictors
across various quantiles of the response variable. Insights into potential asymmetries, non-linearities, and the
tails of the distribution can be gained by examining how the relationships between variables change across the
 distribution. For comprehending the conditional distribution of economic variables and estimating various
quantiles of interest, it offers a flexible and reliable methodology.

3.3.4. AUTOREGRESSIVE DISTRIBUTED LAGS (ARDL) MODEL

The Autoregressive Distributed Lags model is an econometric framework used to examine the dynamic
relationships between variables in the context of an economic time series. Since it can accommodate both
short- and long-term relationships, it is a flexible model that captures the dynamics of adjustment processes
over time. It is especially helpful when researching asymmetrical relationships where a variable reacts
differently to positive and negative shocks. Asymmetric adjustment speeds can be accommodated, and it can
also capture the various effects of both positive and negative shocks on the relevant variables.
The model is likely to be used to analyze the asymmetric relationships among variables, test hypotheses
regarding the presence of asymmetry, and bring up predictions or policy recommendations based on the
estimated coefficients. The main tool of methodology used was the NARDL.
- Nonlinear Autoregressive Distributed Lags (NARDL) model : It is an extension of the Autoregressive
Distributed Lags (ARDL) model that takes nonlinear relationships between variables into account. The
NARDL model captures nonlinearities in the relationships, allowing for more flexible modeling of the
dynamics and interactions among variables. This model specifies the nonlinear functional form of the
relationship between the dependent variable and lagged values of the dependent variable and other significant
variables. This enables the data to be examined for potential threshold effects, asymmetries, or other nonlinear
patterns.
By specifying an appropriate nonlinear function (such as a threshold function, logistic function, or spline
function) for the lagged values of the dependent variable, the NARDL model enables the estimation of
nonlinear relationships between variables. This enables the model to capture any potential nonlinear patterns in
the data, such as asymmetries and threshold effects. To estimate the NARDL model, the analyst must then
choose suitable nonlinear function. The model can be employed to examine nonlinear relationships between
variables, test hypotheses about the existence of nonlinearities, and make predictions or recommendations for
policy based on the estimated coefficients.

3.3.5. ORDINARY LEAST-SQUARES (O.L.S.) MODEL

Also known as linear regression, O.L.S. is a statistical method used to analyze the correlation between a
dependent variable and one or more independent variables. To interpret the relationship between the dependent
variable and the independent variables, the OLS model provides estimated coefficient values. Additionally, it
enables hypothesis testing, coefficient significance testing, and dependent variable prediction based on updated
independent variable values.
OLS makes a few assumptions just to provide accurate estimation and trustworthy inference. These
presumptions include homoscedasticity (constant error variance), linearity, lack of perfect multicollinearity,
endogeneity, homoscedasticity (constant error variance), and normally distributed errors. When the
assumptions hold, OLS provides accurate and reliable estimates of the coefficients. Efficiency means that,
among all linear unbiased estimators, the OLS estimates have the smallest variance. However, violations of
these assumptions can change the validity of the OLS estimates and inference.

3.3.6. Asymmetric Mixed Data Sampling (AMIDAS) Model

The asymmetric mixed data sampling (AMIDAS) model is an econometric framework that can be used to
analyze and forecast time series data with a mixture of high-frequency and low-frequency components. It is
especially helpful when working with economic and financial data sampled at various frequencies, such as
daily and monthly data.
To consider any potential asymmetries in the relationships between the variables, the AMIDAS model uses an
asymmetric weighting scheme. This makes it possible to capture potential asymmetric responses by giving
different weights to the positive and negative values of the high-frequency variable. An asymmetric weighting
scheme is used in the AMIDAS model to consider any potential asymmetries in the relationships between the
variables. This makes it possible to capture potential asymmetric responses by giving different weights to the
positive and negative values of the high-frequency variable. Overall, it offers a flexible framework for
modeling and projecting mixed-frequency time series data, enabling a more accurate representation of the
underlying dynamics and relationships.

3.4. EMPIRICAL REVIEW

3.4.1. OIL PRICE AND INDUSTRIAL OUTPUT

Several authors of research journals on the relationship between oil price and industrial output found a
positive relation between both variables. Khan et. al. (2020) examined the relationship of the U.S. industrial
production with crude oil and natural gas prices for the period 1986 – 2018. Using Time-varying Parameter
Structural Vector Auto-regression (with Stochastic Volatility), they the U.S. industrial production has a positive
(demand driven link) with crude oil prices in both short- and long-term periods. Awartani et. al. (2020)
investigated the nature of asymmetry in the influence of oil price changes on output in the countries at the
Middle East and North Africa (MENA) i.e. for the time frames; Egypt: 2010 – 2018, Saudi Arabia: 2006 –
2018, the UAE: 2008 – 2016, Kuwait: 2009 – 2016, Tunisia: 2007 – 2018, Qatar: 2009 – 2016. By putting the
Nonlinear Autoregressive Distributed Lags (NARDL) Model into use, the authors found that the danger to
economic growth and employment in the MENA region lies when the oil price falls, showing a positive
correlation between both variables.
In addition, Alao and Payasliogu (2021) studied BRAZIL, MEXICO and 35 OECD Countries, with the aim
of explaining the asymmetry between oil price changes and industrial output. Using Dynamic Conditional
Correlation – Generalized Autoregressive Conditional Hetero-Skedasticity (DCC-GARCH) and corrected,
cDCC-GARCH Models for Symmetric Estimation and Employs GJR-GARCH For Asymmetric Estimation,
the conclusion was that there is interdependence of oil price and industrial production in Mexico and Brazil.
Gokmenoglu and Taspinar (2015) investigated the relationship between the oil price and industrial production
for 1961 to 2012 period in the case of Turkey. The Granger causality test confirms that oil price changes affect
the industrial production positively. Maitra et. al. (2021) investigated the direction and extent of connectedness
between fluctuating oil prices and the logistics industry, in the U.S., using data from 2000 to 2019. GJR-
GARCH - DECO approach (Generalized Autoregressive Conditional Heteroskedasticity) model with DECO
(Dynamic Equicorrelation) was used, and the results showed a positive connectedness between both variables.
Iqbal and Shetty (2018) examined the impact of oil price shocks in relation to the firm in the global oil and gas
industry, using data from 1980 to 2013. The authors utilize a vector autoregressive (VAR) framework, and the
results show that there is a positive relationship between oil price shocks and output by the firms in the oil and
gas industry.
On the other hand, other authors have found a negative relation between both variables. Ahmed et. al. (2012)
examines the impact of oil price changes on the US industrial production during the period 1980 to 2010.
Applying the Generalised Autoregressive Conditional Heteroskedasticity (GARCH), the authors concluded
that there is a negative relationship between oil price changes and industrial production over an extended
period. Elder (2021) analyzed the relationship between oil price change and industry-level production in
Canada for the years 1986 to 2018. Results from his Heteroskedastic Vector Autoregression (VAR) test gave
that oil price volatility has a negative effect on industrial activity (output).
Likewise, Valadkhani and Smyth (2017) provided a more in-depth treatment of the dynamic effects of the
price of crude oil on industrial output growth in the U.S. using data from 1985 to 2016. Asymmetric Mixed
Data Sampling (AMIDAS) model was used by the authors, who discovered that an oil price rise has a sharp,
short, and negative effect on industrial output. Nie and Yang (2016) sought to capture the effects of energy
price fluctuations on industries in China. By using the Ordinary Least-Squares (O.L.S.) Model, energy prices
and outputs from industries shared a negative relationship. Lee and Ni (2002) analyzed the effects of oil price
shocks on demand and supply in various industries in the U.S. between 1981 to 2001. They used Vector
Autoregression (VAR) model and got to the conclusion that oil price and output of industries (like the
automobile) share a negative relationship. Aye et. al. (2014) sought to investigate the effect of oil price
fluctuations on the South African industrial production using observations covering the period 1974 to 2012.
Using a bivariate GARCH-in-mean VAR, the results show that oil price uncertainty negatively impacts South
Africa's industrial production.
Finally, Moradi et. al. (2010) investigated the effect of price fluctuation on the amount of industrial and
agricultural in Iran, during 1979 to 2009. The result of Augmented Dickey-Fuller (ADF) test showed a
negative relationship between oil price changes and Agriculture industry. Kumar and Maheswaran (2013)
examined the spillover effects from crude oil prices to the major Indian industrial sectors using Generalised
Autoregressive Conditional Heteroskedasticity (GARCH), during 2004 to 2012. We found negative
relationship between oil price changes and the industrial output level for the nation’s economy. Mehrara and
Sarem (2009) examined the effects of oil price shocks on industrial production in three oil-exporting countries,
namely Iran, Saudi Arabia and Indonesia using annual data for the period 1970–2005. Results from the Zivot
and Andrews Unit Root Tests, Gregory and Hansen Cointegration Tests shows a negative relationship between
the variables in Iran and Saudi Arabia, but no effect in Indonesia.
A few authors reached indefinite conclusions or a conclusion of correlations. Jiang et. al. (2020) focused on
how oil price shocks affect the output of mining industry in the U.S., using data from 1974 to 2016. They used
the Generalised Autoregressive Conditional Heteroskedasticity (GARCH), and the results from their analysis
was a negative correlation between both variables once the shock is endogenous (within the system) and has no
effect once it’s a non-U.S. shock. Nonejad (2021) sought to check if the price of crude oil help improves and
determine the accuracy of the world industrial production, within the time frame of 1973 to 2019, using Brazil,
China, India, Indonesia, the Russian Federation and South Africa as his countries of analysis. She used Vector
Autoregressive (VAR) model for analysis and concluded that not all nonlinear crude oil price changes are
equally important or have effect on the world’s industrial output level.
Also, Huh (2019) studied the relationship between oil price and Korean industrial production, using data
from 1990 to 2010. Using Granger Causality test, the author realized that oil price fluctuations driven by
supply factors had no effect on industrial production. Jiao et. al. (2012) uses a structural vector autoregression
(SVAR) model to empirically examine the impact of oil price shocks on industries in China for period 2003 to
2010. The results show that an oil price shock leads to significant output increases for the petroleum and
natural gas extraction industry while the impact on the petroleum processing industry is exactly the opposite.
Rising oil prices will not significantly affect the manufacture of raw chemical materials and chemical products
and of non-metallic mineral products. Oil price shocks have a long-term negative effect on the road
transportation industry. Chen et. al. (2019) constructs a time-varying parameter structural vector auto-
regression with stochastic volatility (TVP-SVAR-SV) model to analyze the time-varying effects and structural
change of oil price shocks on China's output within the years 2006 to 2017. The Authors concluded that the
effects of oil price shocks on output in the industrial chain changes over time.

3.4.2. OIL PRICE AND EMPLOYMENT

Several authors of research journals on the relationship between oil price and employment found a positive
relation between both variables. Dogrul and Soytas (2010) investigated the causality between unemployment
and energy (crude oil) prices in Turkey for the period 2005 to 2009. Applying the Toda–Yamamoto (TY)
procedure, the shocks in the price of oil have a negative impact on Turkey's unemployment rate. Nusair (2020)
examined the asymmetric effects of oil price shocks on the unemployment rates of Canada and the U.S.
Employing the linear autoregressive distributed lag (ARDL) model and the asymmetric nonlinear ARDL
(NARDL) model, change in oil prices have a negative effect on unemployment rate, in the long run. Koirala
and Ma (2020) studied the effects of oil price changes on U.S. aggregate and sectoral employment growth in
the presence of time-varying oil price changes in the U.S. during the period 1974 to 2018. Using the Bivariate
GARCH-in-mean Vector Auto-regression Model (VAR), the found that there was a negative relationship
between oil price changes and sectoral and aggregate unemployment.
 Unlike their counterparts above, some authors who have investigated the relationship between oil price and
employment found a negative relation between both variables. For instance, Ordonez et. al. (2019) analyzed
the effect of oil price shocks on unemployment in an oil-importing country such as Spain for the time frame
2000 to 2014. Using the Bayesian Structural Vector Auto-regression Model (SVAR), oil price changes and
employment rate have a negative relationship, although any decreases in the price had less of an effect in terms
of a recovery in the employment rate. Herrera and Karaki (2015) analyzed the effect of oil price innovations on
U.S. industrial unemployment in the U.S. between 1972 to 2014. The results of their simultaneous equation
models, there is a positive relationship between the variables. Uri (1996) addresses the question of whether
fluctuations in the price of crude oil have affected agricultural employment in the United States, using data
from 1947 to 1994. Augmented Dickey-Fuller (ADF), Phillips-Perron (PP) tests carried out showed that
agricultural employment and oil price have a negative correlation.
Kang et. al. (2013) explained the response of U.S. state employment to oil price volatility, using data from
1983 to 2010. Using Univariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) Process,
the study provides evidence that oil price volatility has a significant negative effect on state employment, with
the impact varying across different sectors of the economy. Kocaaslan (2019) searched for the effects of oil
price shocks on U.S. unemployment rate, using a GARCH-in-mean VAR model for the period 1974 to 2017.
Their findings were that negative oil price shocks leads to negative unemployment rate. Kisswani and Kisswani
(2019) investigated the asymmetric impact of oil prices on employment in the U.S., using data from 1970 to
2015. They used Nonlinear Autoregressive Distributed Lags (NARDL) Model for analysis and reach the
conclusion that total employment and oil price change have a negative correlation.
In contrast, Khan, and Mansur (2013) examined how local energy prices affects employment level in United
States of America from 1986 to 2018. Using Maximum Overlap Discrete Wavelet Transform and Quantile
Regression, their findings were ambiguous as some selected industries (like textile) witnessed positive
correlation while others witnessed a negative.

3.4.3. OIL PRICE ON INDUSTRIAL OUTPUT AND EMPLOYMENT

Ewing and Thompson (2007) examined the empirical relationship between oil prices, industrial production,
and unemployment in United States of America during 1982 to 2005. They used the Hodrick–Prescott Filter
(HP), Fixed-length Symmetric Band-pass Baxter–king filter (BK), and the recently developed Asymmetric
Band-pass filter proposed by Christiano and Fitzgerald (CF), reaching the end that oil prices have a positive
relationship between oil price increases and both industrial output and employment.