Oil prices and European household consumption expenditures

This study examines the influence of changes in oil prices on total household consumption along with its sub‐components from 1996 to 2018, a period characterised in the literature by the declining impact of oil price shocks on macroeconomic activity. Using several dynamic panel VAR econometric approaches, we examine the role of oil prices alongside income, wealth and debt on household consumption expenditures of 30 European countries. Results from the Granger causality tests and impulse response analysis suggest an unanticipated increase in oil prices lowers household consumption. These results are robust to changes in proxies for income, wealth and oil prices, variable ordering, estimation method and the addition of household debt service. Moreover, the inclusion of a Fourier function to the baseline panel specifications to control for unobserved non‐linear structural breaks does not change our main findings. A threshold panel VAR model with median oil price changes used as a threshold indicator suggests the reaction of household consumption to oil price shocks is regime‐dependent; i.e., consumption only reacts to oil price shocks during periods when oil prices grow faster than the median rate of change. All consumption sub‐components decrease in response to increasing oil prices, but as expected, the consumption of durable goods exhibits the largest decline after an oil price shock.