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While limited by its scarcity of natural resources, the impacts of energy price changes on Taiwan's economic activities have been an important issue for social public and government authorities. This study applies the multivariate threshold model to investigate the effects of various international energy price shocks on Taiwan's macroeconomic activity. By separating energy price changes into the so-called decrease and increase regimes, we can realize different impacts of energy price changes and their shocks on economic output. The results confirm that there is an asymmetric threshold effect for the energy-output nexus. The optimal threshold levels are exactly where the oil price change is at 2.48%, the natural gas price change is at 0.66%, and the coal price change is at 0.25%. The impulse response analysis suggests that oil price and natural gas shocks have a delayed negative impact on macroeconomic activities.

Energy is essential to all economic activities, pushing developed and developing economies to pursue long-term stable energy prices and energy supply. These targets are very beneficial to economic development. However, greater energy consumption may increase the possibilities of global warming and climate change. According to the International Energy Outlook of Energy Information Administration (EIA) (2010), the global consumption of marketed energy from all fuel sources will persistently rise over the projection period of 2007–2035. Fig. 1 shows fossil fuels are expected to continue supplying much of the energy used worldwide. Although conventional fuels remain the largest source of energy, the global share of marketed liquids and natural gas consumption will correspondingly fall from 35% in 2007 to 30% in 2035 and from 22% in 2007 to 21% in 2035. On the contrary, the global share of marketed coal, nuclear, and renewable consumption will rise in the same periods. In particular, the global share of renewable consumption will rise from 9% in 2007 to 13% in 2035. It can be seen that clean energy still cannot replace the conventional type of energy use. In the reference case of International Energy Outlook of EIA, the use of liquids grows modestly or declines in all end-use sectors (except for the transportation sector), where in the absence of significant technological advances liquids will continue to provide much of the energy consumed.Energy price shocks are generally acknowledged to have important effects on both the economic activity and macroeconomic policy of industrial countries. Huge and sudden rises in energy prices increase inflation and reduce real money balances with negative effects on consumption and economic output. The most acute supply shocks hitting the world economies since World War II have been the sharp increase of oil and other energy products' prices. Since the 1970s, oil prices in the world market have experienced fluctuations, including rather sharp increases during the first and second oil crises. During the two periods of 1973–1974 and 1978–1979, when the Organization of Petroleum Exporting Countries (OPEC) first imposed an oil embargo and the Iranian revolution disrupted oil supplies, respectively, the prices of a barrel of oil increased from $3.4 to $30. Fig. 2 depicts the time series of international energy prices from 1983 to 2009, showing energy prices rapidly rising from $16 to $26 after the Gulf War in 1990. Due to a decline in 1999 following the Asian financial crisis, energy prices fell from $20.28 to $11.13. Since 2000, oil prices have been on an upward trend with repeated fluctuations. In particular, oil price volatility in the crude oil market rose spectacularly during 2004–2008. By March 13, 2008, the West Texas Intermediate (WTI) spot crude oil price had spiked to a historical high of $110.21 per barrel. EIA (2009) estimated that the January 2010 WTI futures contract under volatility at that time would be $61 per barrel at the lower limit and $104 per barrel at the upper limit under a 95% confidence interval. As a whole, oil prices are more volatile than prices of natural gas and coal. Although the volatility and historical event turning points of international energy prices are rather different, their long-term trends are quite similarAs energy prices play a critical role in influencing economic growth and economic activities, we want to analyze the linkage of international energy prices and macroeconomic variables in Taiwan with linear and asymmetric frameworks. This study is motivated by two reasons. First, several studies have indicated that oil price shocks have a significantly negative impact on industrial production (e.g., Mork, 1989, Hooker, 1996, Hamilton, 1996, Bernanke et al., 1997, Hamilton, 2003 and Hamilton and Herrera, 2004), yet little is known about the relationship between other energy prices and economic activities. Second, some studies already consider the asymmetric relation in terms of the impact of an oil price change or its volatility on industrial production and stock returns (e.g., Mork, 1989, Mork et al., 1994, Sadorsky, 1999 and Papapetrou, 2001). However, these studies use zero as a cutoff point for distinguishing oil price changes into up (increase) and down (decrease) segments. The aforementioned studies may encounter some problems. First, using a predetermined value as a trigger point lacks any statistical verification. Second, they neglect the asymmetric association to accurately gage varying degrees of the impacts of energy price changes on the macroeconomy. Third, the two-regime model based on the value of a variable (greater than zero or less than zero) is somewhat arbitrary. Is it true that a very small increase in energy prices changes would have a significant negative effect on economic activities? Although oil price changes certainly affect economic activities, they will also affect the production sector when the oil price increase exceeds a certain economical threshold level. Finally, each energy price change may have different threshold values. Therefore, a two-regime model based on the value of zero is arbitrary. To cautiously respond to these arguments, we need more rigorous econometric models. On the country level, oil is of particular importance to many Asian economies as most are net importers of this energy product. Because Taiwan is in fact an island country with limited indigenous energy resources and its energy import rate reached over 99.32% at the end of 2009, it has been identified as one of six Asian economies (including Japan, Philippines, Singapore, South Korea, and Thailand) that are easily subjected to world oil price fluctuation (Aoyama and Berard, 1998). For government authorities, understanding the different impacts of energy price changes on economic output would allow applicable policies to react to these shocks. This study applies the multivariate threshold error correction model (MVTECM) by Tsay (1998) to analyze the impacts of different international energy price changes on Taiwan's macroeconomic activities. The energy price changes are treated as the threshold variable to test whether there is an asymmetric association in the multivariate VAR model. While it has been confirmed that the VAR model has an asymmetric threshold effect in the energy price–macroeconomy relationship, it is necessary to separate the regime based on the specified threshold values of each energy price change. We further analyze different impacts of an energy price shock on industrial production under different regimes. The rest of this paper is as follows: Section 2 gives an overview of the related literature on oil price shocks and macroeconomic activity. Section 3 illustrates data sources and the methodology. Section 4 covers the empirical analysis. Finally, Section 5 addresses some concluding remarks and policy implications.

Following the 2003 Iraq War and from the increased oil demand from developing countries, Asian countries have been filled with tension and uncertainty after oil prices began to rise again in early 2004. As oil prices have increased, we refocus attention to the issue of energy price change and its impact on economic activities. Even though there are some related studies of the use of an asymmetric relation to examine the impact of an oil price change on an economy, research studies do not consider the speed of oil price adjustment before estimation and also neglect the impact from oil price shocks. To overcome the weakness of prior studies, we apply the multivariate threshold VAR model proposed by Tsay (1998), whereby the threshold value determined by the dataset delineates the sample instead of using the arbitrary zero as a cutoff point. We explore the speed of response (delay periods d) and the degree of critical level (threshold value c) as a consequence of the impact of a positive energy price change and its shock. The results confirm that there exists a threshold non-linearity relationship between energy prices and macroeconomic variables. The optimal threshold levels are 2.48% in terms of oil price change, 0.66% in terms of natural gas price change, and 0.25% in terms of coal price change. Due to Taiwan's high economic development, the threshold of the critical level is greater as evidenced by the positive impact of an oil price change and its shock. The optimal threshold value seems to vary according to how an economy depends on imported energy and the attitude towards accepting energy-saving technologies. If a country has a higher energy import ratio and acquires a higher ratio of energy use in the industrial sector, then it will have a shorter delay in terms of its economic response from the positive impact of an energy price change. As our results indicate, the delay from the threshold variable is only one month for an oil price change, while coal and natural gas price changes both incur two months. Compared to other energy price changes (i.e., coal price and natural gas price), oil price changes have the largest explanatory effect on Taiwan's industrial production. Moreover, such changes better explain industrial production than the real interest rate when oil price changes exceed the threshold value (regime two). For Taiwan's labor market, international energy price shocks have a positive effect on the unemployment rate in the short term, implying that an increase in energy prices will increase the cost of production which in turn results in a higher level of unemployment. Policy implications derived from this study need to be clarified. In order to design an applicable energy price policy, we need to consider the asymmetric relationships between energy prices and the macroeconomy. In particular, we have to capture a degree of economic tolerance zone that protects the economy from the impact of an international price change and its shock. It is evident that oil prices have the largest threshold level of economic tolerance among the major international energy prices for Taiwan. By inspecting the pattern of energy consumption in the industrial sector, we can explain this phenomenon. In the energy balance sheet published by the Bureau of Energy, the overall proportion of coal consumption in the industrial sector is 0.88, while the overall ratio is 0.74 for imported liquid natural gas, and 0.53 for crude oil and petroleum products. Higher coal and natural gas prices will directly increase production and operating costs. Therefore, firms are more sensitive to the energy price fluctuations. They merely are able to prevent minor price increases from harming their economic benefits. Based on our evidence, when an international energy price change exceeds an estimated optimal threshold level, energy price shocks will have a significant effect on industrial production. To cope with the situation, government authorities should adopt tariff reductions, subsidies, and adjust domestic energy prices at different times. These measures may reduce any impacts directly from international energy price fluctuations. Even though we have found possible factors to explain Taiwan's macroeconomic fluctuations and the speed of adjustment from the impact of energy price shocks, there are still some limitations to this research, including a host of possible exogenous factors that may affect macroeconomic variables and delay of the effect such as the degree of openness of the economy and fiscal and exchange rate policies (e.g., Bohi, 1991). These omitted variables may be included in future analyses for testing the robustness of the result. In addition, international energy price changes may impact open economies both directly and indirectly. Future research studies can identify these direct and indirect channels of oil price shocks on the labor market.