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Oil price fluctuations and their impact on oil-exporting emerging economies
Abstract
How do oil price fluctuations affect economic activity and policy in the context of oil-exporting emerging economies? Past research suggests that the output responses to oil price innovations are asymmetric in nature but does not directly test the asymmetry in the government expenditure adjustments triggered by the shock. Moreover, many studies quantifying these asymmetric responses are fraught with methodological concerns. This paper assesses the empirical relevance of such asymmetries by studying how output and government expenditure respond to oil price shocks. Our estimation employing unbiased methodologies allows us to be agnostic regarding asymmetries in the responses depending on the direction and size of the shock. Using data for a diverse group of emerging economies, we find substantial evidence for the presence of asymmetries. Country-specific factors and/or fiscal stabilization incentives are possible explanations for the asymmetric responses. We draw policy recommendations for understanding the growth process specific to resource-rich emerging economies.
... They found strong evidence that volatility in oil prices is a significant determinant of market behaviors, especially in the energy and manufacturing sectors. Agboola, Chowdhury, and Yang (2024) extend these results further by observing that geopolitical tensions, such as the Russo-Ukrainian conflict, increase oil price shocks and spillovers to equity markets. They align with Kilian and Zhou (2020), which prove that aggregate demand shock resulting from oil price change has a much greater magnitude of impact than the supplyside shock on the market's volatility. ...
... A stable political environment will be highly conducive to attracting institutional investors due to the predictability of regulatory frameworks. Agboola et al. (2024) suggest that such environments buffer spillover effects from external shocks, such as geopolitical conflicts and commodity price fluctuations, by building strong policy buffers. ...
... A politically stable environment establishes a framework for deemphasizing the risk factors due to oil price fluctuations; investors may perceive the market as more robust and resilient against various exogenous shocks. These results align with the existing literature on the interlinking of macroeconomic variables and their resilience at the market level (Agboola et al., 2024;Khan & et al., 2020). ...
The study examines the effect of the variable’s inflation, global oil price index price, and foreign remittances on stock market volatility represented through movement in the KSE 100 index, focusing on political stability as a moderator. The empirical evidence suggests that inflation and the global oil price index reflect insignificant direct influence on the stock market volatility. However, their influence becomes significant in the presence of political stability. Political stability increases investor confidence, reduces risk perception, and mitigates the risk of macroeconomic shocks that lead to reduced stock market volatility. The findings emphasized the critical role of governance in fostering the resilience of the financial market, especially for emerging economies like Pakistan. Future studies could probe further into the sectoral dynamics and consider other alternative variables as moderators, such as institutional quality, to provide detailed insight into the behaviors of stock market performance in developing economies tend to exhibit. These findings have many implications for policymakers, emphasizing governance reforms, stabilization policies of the macroeconomy, and diversification of markets to ensure the financial sector's stability.
... The asymmetric impact of energy commodity prices on economic activity constitutes another significant area of research. The degree of asymmetry can have varied implications for individual economies (Agboola et al., 2024). Crude oil remains a primary energy source, playing a pivotal role in the economy (Śmiech et al., 2021). ...
... Furthermore, unexpected changes in oil prices contribute to uncertainty, leading to reduced corporate spending and constrained household consumption (Brown, Yücel, 2002;Dąbrowski et al., 2022;Herrera et al., 2015). Additionally, Agboola et al. (2024) demonstrated that fluctuations in oil prices are associated with the cyclicality of government expenditures, which can influence production variability. ...
... The energy sector plays a key role in shaping economic growth and macroeconomic stability. The impact of energy prices on inflation is significant, and events such as the COVID-19 pandemic and the war in Ukraine have highlighted the global vulnerability to energy shocks and political uncertainty (Agboola et al., 2024). Poland, as a country dependent on fossil fuels, is particularly exposed to these developments, highlighting the need for strategic interventions and energy policies to minimise negative economic impacts and ensure long-term inflationary stability. ...
The relationship between energy commodity prices and inflation has important implications for fiscal policy and economic stability. The nature of energy commodities is multi-dimensional, serving both as basic raw materials in production processes and as critical consumer goods. This study focuses on estimating the impact of oil, natural gas and coal prices on inflation in Poland. Through the adoption of multiple regression models using quarterly data from Q2 2000 to Q3 2023, the study aims to estimate the impact of energy commodity prices, particularly oil, coal, and natural gas, on inflation in Poland and to answer the research question: What role do energy commodity prices play in shaping inflation in Poland? The empirical analysis revealed that oil and coal prices significantly influence inflation, reflecting Poland's energy dependency. Natural gas prices showed a limited impact due to lower consumption and mitigation policy measures. The significant impact of energy prices suggests that energy market developments should be closely monitored for their inflationary potential. The study offers valuable insights for policymakers in their efforts to effectively manage inflationary pressure. The article contributes to the literature by presenting the short-run relationship between inflation and energy commodity prices, covering long period of time with both financial, COVID-19 crisis and the Russian aggression in Ukraine.
... It was also observed that an increase in real oil prices led to a real exchange rate appreciation in GCC countries with minimal impact on the nominal exchange rate, which differed from the results for non-GCC oil exporters. Agboola et al. (2024) examined the asymmetric and empirically significant effects of unexpected changes in oil prices on oil-exporting emerging markets using nonlinear models for eight oil-exporting countries. Various nonlinear models were developed and estimated for eight oil-exporting countries. ...
This study uses the panel ARDL method to analyze the relationship between oil exports, renewable energy consumption, agricultural industry, and economic growth in selected OPEC member countries. The study examined data from 9 OPEC countries from 1990 to 2024. The findings showed that while oil exports in OPEC countries have a positive long-term effect, they have a negative short-term impact in Nigeria and a positive short-term impact in other countries. The consumption of renewable energy has been found to have a negative long-term effect. However, the short-term impact varies from country to country, with the observation that the short-term effect is insignificant in most countries. The long-term effect of the food production index is statistically insignificant. On the other hand, the short-term effect varies significantly among countries, with a notable negative impact in some countries. Notably, Equatorial Guinea stands out from other variables, as all variables have insignificant effects in the short term. Research findings have demonstrated that oil exports play a supportive role in the economic growth of OPEC countries.
... The impact of shocks or fluctuations in the price of crude oil on macroeconomic policy does not appear to be stable across time. According to Castro and Jimerez-Rodriguez (2020) and Agboola et al. (2024), there are times when both variables move in the same direction and times when they are moving in different directions. Changes in the price of the crude oil have had positive and negative effects in Nigeria. ...
The main objective of the study was to determine the way fluctuations in the price of crude oil affected macroeconomic variables in Nigeria from 2000 Q1 to 2022 Q4. The data was analysed in the paper using Structural Vector Autoregressive (SVAR) models. According to the findings, Nigeria's current economic growth has been significantly impacted by lag GDP values. This indicates that economic growth in Nigeria was significantly impacted by one-period lag GDP by 3,791.7 units in the short-run and 7,430.4 units in the long-run. Also in the short-run, the current broad money supply was significantly impacted by both the one-period lag general price level (0.445 units) and the one-quarter lag broad money supply (757.7 units). According to the crude oil price fluctuation model, current crude oil price variations in Nigeria are significantly influenced by one-period lags in general price level (-64.9 units), crude oil price fluctuation (1,114.6 units), and fiscal budget deficits (0.65 units). All of the one-period lagged coefficients of macroeconomic variables, including real GDP, broad money supply, interest rates, general price level, inflation rates, and fiscal budget deficits, had a significant impact on current economic growth and broad money supply, respectively, as demonstrated by the long-run economic growth and broad money supply models. The real GDP's impulse response to fluctuations in crude oil prices fell during the first period, peaked during the second, and then increased to show a positive trend during the third. This study came to the conclusion that shocks or fluctuations in the price of crude oil are the main cause of macroeconomic policy instability in Nigeria. The study recommended that the government should control foreign exchange rate regimes, pursue expansionary monetary policy, general price level control and stabilisation measures.
The oil price influences and tendencies have gained, lately major developments both at the European level and on the international level. Moreover, several interconnections between the energy sector and oil price influences have become the panacea of several important research and studies. In this article, we provide a qualitative and quantitative This is an Open Access article distributed under the terms of the Creative Commons BY 4.0 license (Creative Commons-Attribution 4.0 International-CC BY 4.0) which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. 2 approach to the interconnections manifested between oil price movements and the developments of the energy sector. The study is focused on Central and Eastern European Countries which have similarities and differences both at the energy sector level and economy level. The econometric techniques used in this study reveal the importance of the causality relationship between oil price movements and the energy sector taking into account the macroeconomic context. The conclusions of this study highlight some important fine-tuning aspects that must be recalibrated in Central and Eastern European Countries to increase the economic outcomes, strengthen the energy sector, and respond properly to the oil price movement trends.
What explains the worldwide changes in central bank design over the past five decades? Using a new dataset on central bank institutional design, this paper investigates the timing, pace and magnitude of reforms in a sample of 154 countries over the period 1972-2017. I construct a new dynamic index of central bank independence and show that past levels of independence, as well as regional convergence, represent important drivers of changes in central bank design. An external pressure, such as obtaining an IMF loan, or political events, such as democratic reforms and the election of nationalistic governments, also impact the reform process. Reforms also follow periods of high inflation rates suggesting an endogeneous evolution of central bank independence. The results also reveal important heterogeneities in the reform process depending on the level of development, the size and direction of reforms, as well as the different dimensions along which central bank legislation can be amended.
We explore the effect of the sharp and sustained decline after June 2014 in the global price of crude oil (and hence in the U.S. price of gasoline) on U.S. real GDP growth. Our analysis suggests that this decline produced a cumulative stimulus of about 0.9 percent of real GDP by raising private real consumption and non-oil-related business investment, and an additional stimulus of 0.04 percent, reflecting a shrinking petroleum trade deficit. This stimulative effect, however, has been largely offset by a large reduction in real investment by the oil sector. Hence, the net stimulus since June 2014 has been close to zero. We show that the U.S. economy’s response was not fundamentally different from that observed after the oil price decline of 1986. Then as now, the U.S. economy’s response is consistent with standard economic models of the transmission of oil price shocks. We find no evidence that frictions in reallocating capital and labor across sectors or increased uncertainty about the price of gasoline explain the sluggish response of U.S. real GDP growth. Nor do we find evidence of financial contagion, of spillovers from oil-related investment to non-oil-related investment, of an increase in household savings, or of households deleveraging.
It has been 40 years since the oil crisis of 1973/74. This crisis has been one of the defining economic events of the 1970s and has shaped how many economists think about oil price shocks. In recent years, a large literature on the economic determinants of oil price fluctuations has emerged. Drawing on this literature, we first provide an overview of the causes of all major oil price fluctuations between 1973 and 2014. We then discuss why oil price fluctuations remain difficult to predict, despite economists' improved understanding of oil markets. Unexpected oil price fluctuations are commonly referred to as oil price shocks. We document that, in practice, consumers, policymakers, financial market participants, and economists may have different oil price expectations, and that, what may be surprising to some, need not be equally surprising to others.
This paper tests the three leading specifications of asymmetric and possibly nonlinear feedback from the real price of oil to U.S. industrial production and its sectoral components. We show that the evidence for such feedback is sensitive to the estimation period. Support for a nonlinear model is strongest for samples starting before 1973. Instead, using post-1973 data only, the evidence against symmetry becomes considerably weaker. For example, at the aggregate level, there is no evidence against the hypothesis of symmetric responses to oil price innovations of typical magnitude, consistent with results of Kilian and Vigfusson [Quantitative Economics, 2(3), 419–453 (2011)] for U.S. real GDP. There is strong evidence of asymmetries at the disaggregate level, however, especially for industries that are energy-intensive in production (such as chemicals) or that produce goods that are energy-intensive in use (such as transportation equipment). Our analysis suggests that these asymmetries may be obscured in the aggregate data and highlights the importance of developing multisector models of the transmission of oil price shocks.
Oil revenues play an important role in the political economy of Iran. On average, 60% of the Iranian government revenues and 90% of export revenues originate from oil and gas resources. Current international sanctions on Iran have mainly targeted the oil production capacity of Iran and its exports to the global markets. In this study, we analyze the dynamic effects of oil shocks on different categories of the Iranian government expenditures from 1959-2007, using impulse response functions (IRF) and variance decomposition analysis (VDC) techniques. The main results show that only Iran's military expenditures significantly respond to a shock in oil revenues (or oil prices), while non-military expenditure categories do not show significant reactions to such shocks.
In the past, industrial countries have tended to pursue countercyclical or, at worst, acyclical fiscal policy. In sharp contrast, emerging and developing countries have followed procyclical fiscal policy, thus exacerbating the underlying business cycle. We show that, over the last decade, about a third of the developing world has been able to escape the procyclicality trap and actually become countercyclical. We then focus on the role played by the quality of institutions, which appears to be a key determinant of a countrys ability to graduate. We show that, even after controlling for the endogeneity of institutions and other determinants of
scal procyclicality, there is a causal link running from stronger institutions to less procyclical or more countercyclical fiscal policy.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
This paper reviews some of the literature on the macroeconomic effects of oil price shocks with a particular focus on possible nonlinearities in the relation and recent new results obtained by Kilian and Vigfusson (2009).
This study assesses empirically the effects of oil price shocks on the real economic activity of the main industrialized countries. Multivariate VAR analysis is carried out using both linear and non-linear models. The latter category includes three approaches employed in the literature, namely, the asymmetric, scaled and net specifications. Evidence of a non-linear impact of oil prices on real GDP is found. In particular, oil price increases are found to have an impact on GDP growth of a larger magnitude than that of oil price declines, with the latter being statistically insignificant in most cases. Among oil importing countries, oil price increases are found to have a negative impact on economic activity in all cases but Japan. Moreover, the effect of oil shocks on GDP growth differs between the two oil exporting countries in the sample, with the UK being negatively affected by an oil price increase and Norway benefiting from it.
This paper analyses the effects of oil price shocks on stock returns in Norway, an oil exporting country, highlighting the transmission channels of oil prices for macroeconomic behaviour. To capture the interaction between the different variables, stock returns are incorporated into a structural VAR model, as stock prices are an important transmission channel of wealth in an oil abundant country. I find that following a 10 percent increase in oil prices, stock returns increase by 2.5 percent, after which the effect eventually dies out. The results are robust to different (linear and non-linear) transformations of oil prices. The effects on the other variables are more modest. However, all variables indicate that the Norwegian economy responds to higher oil prices by increasing aggregate wealth and demand. The results also emphasize the role of other shocks; monetary policy shocks in particular, as important driving forces behind stock price variability in the short term.
Making the central bank an agency with the mandate and reputation for maintaining price stability is a means by which a government can choose the strength of its commitment to price stability. This article develops four measures of central bank independence and explores their relation with inflation outcomes. An aggregate legal index is developed for four decades in 72 countries. Three indicators of actual independence are developed: the rate of turnover of central bank governors, an index based on a questionnaire answered by specialists in 23 countries, and an aggregation of the legal index and the rate of turnover.
Legal independence is inversely related to inflation in industrial, but not in developing, countries. In developing countries the actual frequency of change of the chief executive officer of the bank is a better proxy for central bank independence. An inflation-based index of overall central bank independence contributes significantly to explaining cross-country variations in the rate of inflation.
Increases in oil prices have been held responsible for recessions, periods of excessive inflation, reduced productivity and lower economic growth. In this paper, we review the arguments supporting such views. First, we highlight some of the conceptual difficulties in assigning a central role to oil price shocks in explaining macroeconomic fluctuations, and we trace how the arguments of proponents of the oil view have evolved in response to these difficulties. Second, we challenge the notion that at least the major oil price movements can be viewed as exogenous with respect to the US macroeconomy. We examine critically the evidence that has led many economists to ascribe a central role to exogenous political events in modeling the oil market, and we provide arguments in favor of "reverse causality" from macroeconomic variables to oil prices. Third, although none of the more recent oil price shocks has been associated with stagflation in the US economy, a major reason for the continued popularity of the oil shock hypothesis has been the perception that only oil price shocks are able to explain the US stagflation of the 1970s. We show that this is not the case.
According to Frankel and Catao (2011), a commodity-exporting developing economy is advised to target the product price rather than consumer price, as the former monetary policy is automatically countercyclical against the volatile terms of trade shock. This paper constructs a dynamic stochastic general equilibrium model of joint monetary and fiscal policies for a developing oil economy, to find an appropriate monetary rule combined with a pro/counter/acyclical fiscal stance based on a loss measure. The foreign exchange interventions distinguish between a managed and flexible exchange rate regime, while fiscal policy cyclicality depends on the oil output response of public consumption and public investment. The study reveals that the best policy combination is a countercyclical fiscal stance and consumer price monetary targeting under a managed exchange rate regime to stabilize the domestic price inflation, aggregate output, and real exchange rate in a small open economy.
Theory predicts that the level of inflation in an economy and the trend in the prevailing inflation rate may affect how oil price shocks, through their influence on firms’ expectations and price-setting behaviors, are transmitted to inflation. However, empirical evidence regarding this relationship is limited and calls for further exploration. Using data for 12 eurozone countries over the period from 1999 to 2020, we analyze how the inflation environment in which an oil price shock occurs influences its transmission. We find that the inflation environment is a determinant in the way oil supply shocks and oil-specific demand shocks are transmitted to inflation, with positive shocks displaying higher transmission in high inflation environments. Furthermore, transmission of shocks to core inflation, which represents an indirect effect, only occurs in high inflation environments. These findings highlight the need to consider the inflation environment in order to define appropriate monetary policies in response to inflationary pressures caused by oil price shocks.
This paper studies the impact of oil price changes on economic growth in Saudi Arabia to measure its dependency on the crude oil sector. To this end, an On/Off threshold regression is specified to allow the oil/GDP relationship to be asymmetric, nonlinear, and time-varying with regard to the business cycle phases. Further, we empirically test the diversification hypothesis put forward by the National Transformation Program (Saudi Vision 2030) to check whether the equity-energy investment initiative could boost economic growth in Saudi Arabia. First, our findings confirm the contribution of the oil sector to economic growth in the country, but also show that the oil/Saudi economy relationship exhibits nonlinearity and threshold effects, as the impact of oil price varies per regime depending on the state of the market. Second, in line with the Vision 2030 expectations, we are in favor of transforming the economy and opening its equity market. We also quantify a positive and significant impact of equity investment on the Saudi Arabian economy. Further, this diversification route will stimulate a beneficial oil effect on the real economy.
This paper re-examines whether real GDP growth responds asymmetrically to real oil price increases and decreases using a sample that includes the recent oil price declines. I follow Kilian and Vigfusson (2011a) and conduct a test of symmetry. I find no evidence against the null of symmetry using the 3-year net oil price increase specification. Moreover, I find that the results are not stable for different nonlinear transformations of the real price of oil. Finally, evidence of asymmetry vanishes after computing specification robust critical values.
Here's why. (a) The Hodrick-Prescott (HP) filter introduces spurious dynamic relations that have no basis in the underlying data-generating process. (b) Filtered values at the end of the sample are very different from those in the middle and are also characterized by spurious dynamics. (c) A statistical formalization of the problem typically produces values for the smoothing parameter vastly at odds with common practice. (d) There is a better alternative. A regression of the variable at date t on the four most recent values as of date t - h achieves all the objectives sought by users of the HP filter with none of its drawbacks. © 2018 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
The recent oil price fall has created concern among policy makers regarding the consequences of terms of trade shocks for resource-rich countries. This concern is not a minor one – the world’s commodity exporters combined are responsible for 15– of global value added. We develop and estimate a two-country New Keynesian model in order to quantify the importance of oil price shocks for Norway – a large, prototype petroleum exporter. Domestic supply chains link mainland (non-oil) Norway to the off-shore oil industry, while fiscal authorities accumulate income in a sovereign wealth fund. Oil prices and the international business cycle are jointly determined abroad. These features allow us to disentangle the structural sources of oil price fluctuations, and how they affect mainland Norway. The estimated model provides three key results. First, oil price movements represent an important source of macroeconomic volatility in mainland Norway. Second, while no two shocks cause the same dynamics, conventional trade channels make an economically less significant difference for the transmission of global shocks to the oil exporter than to oil importers. Third, the domestic oil industry’s supply chain is an important transmission mechanism for oil price movements, while the prevailing fiscal regime provides substantial protection against external shocks.
The recent plunge in oil prices has brought into question the generally accepted view that lower oil prices are good for the US and the global economy. In this paper, using a quarterly multi-country econometric model, we first show that a fall in oil prices lowers interest rates and inflation in most countries, and increases global real equity prices. The effects on real output are positive, although they take longer to materialize (around 4 quarters after the shock). We then re-examine the effects of low oil prices on the US economy over different sub-periods using monthly observations on real oil prices, real equity prices and real dividends. We confirm the perverse positive relationship between oil and equity prices over the period since the 2008 financial crisis highlighted in the recent literature, but show that this relationship has been unstable when considered over the longer time period of 1946–2016. In contrast, we find a stable negative relationship between oil prices and real dividends which we argue is a better proxy for economic activity (as compared to equity prices). On the supply side, the effects of lower oil prices differ widely across the different oil producers, and could be perverse initially, as some of the major oil producers try to compensate their loss of revenues by raising production. Taking demand and supply adjustments to oil price changes as a whole, we conclude that oil markets equilibrate but rather slowly, with large episodic swings between low and high oil prices.
This paper examines the effects of oil price shocks on the real GDP of the Gulf Cooperation Council (GCC) countries. The empirical method used is the nonlinear cointegrating autoregressive distributed lag (NARDL) model of Shin et al. (2013) in which short-run and long-run nonlinearities are introduced via positive and negative partial sum decompositions of the explanatory variable(s). The results suggest evidence of asymmetries in all the cases. We find significant positive oil price changes in all the cases with the expected positive sign, implying that increases in oil price lead to increases in real GDP. Conversely, negative oil price changes are significant for only Kuwait and Qatar with the expected positive sign, suggesting that decreases in oil price lead to decreases in their real GDP. Further analysis implemented using panel data shows that positive oil prices changes increase real GDP and negative changes decrease real GDP. Overall, the results suggest that positive oil price changes have a considerably larger impact on real GDP than negative changes.
By using a multiple threshold nonlinear autoregressive distributed lag model, this paper assesses the nonlinear relationship among crude oil and petroleum product prices in the United States. While the assessment of the asymmetric impact on petroleum product prices based on the upward and downward movement of crude prices is well documented in the literature, the contribution of this paper is in splitting the crude price fluctuation in multiple partial sum series, which allows for a more detailed and minute analysis of the relationship. Apart from confirmation of nonlinear influences, we also found the presence of a relatively high asymmetric impact at the lower quantiles of crude oil price changes. This implies that the benefits of sharp reductions of crude prices are, in general, not transferred to various petroleum products.
In this paper we analyze the asymmetric impact of oil price changes on the economic activity in Turkey. In contrast to previous studies on Turkey, the existence of an asymmetric relationship between economic activity and oil prices is investigated by regime-dependent impulse response functions and forecast error variance decompositions based on a multivariate two-regime Threshold VAR (TVAR) model. Our analysis suggests that the relationship between oil prices and macroeconomic activity is nonlinear and exhibits an asymmetric pattern: oil price changes have a significant effect on inflation and output when the change exceeds a certain threshold level. The lower response of macroeconomic variables to oil price shocks in the low oil price change regime also indicates that only the shocks exceeding the optimal threshold level are able to create a contraction in the economic activity.
It has been common to assume that the relationship between economic activity and oil prices is asymmetric. Theoretical underpinnings for this asymmetry include costly sectoral reallocation, partial equilibrium models of irreversible investment, and some version of precautionary savings. Yet, recent studies that use new methodologies to test for asymmetries in U.S. data have cast some doubts on that premise. In this paper, we use state-of-the-art techniques to evaluate the presence of asymmetries for a set of OECD countries containing both oil exporters and oil importers. We find very little support for the hypothesis that the response of industrial production to oil price increases and decreases is asymmetric. Our results have important implications for theoretical models of the transmission of oil price shocks: they point towards the importance of direct-supply and direct-demand transmission channels, as well as indirect transmission channels that imply a symmetric response.
Macroeconomic shocks such as wil price increases induce a systematic (endogenous) response of monetary policy. We develop a VAR-based technique for decomposing the total economic effects of a given exogenous shock into the portion attributable directly to the shock and the part arising from the policy response to the shock.
How much does real gross domestic product (GDP) respond to unanticipated changes in the real price of oil? Commonly used censored oil price vector autoregressive models suggest a substantial decline in real GDP in response to unexpected increases in the real price of oil, yet no response to unexpected declines. We show that these estimates are invalid. Based on a structural model that encompasses both symmetric and asymmetric models as special cases, correctly computed impulse responses are of roughly the same magnitude in either direction, consistent with formal tests for symmetric responses. We discuss implications for theoretical models and for policy responses to energy price shocks.
This article examines contrasting claims made by scholars of oil and politics that oil wealth either tends (1) to undermine regime durability or (2) to enhance it. Using cross-sectional time-series data from 107 developing states between 1960 and 1999, I test the effects of oil wealth on regime failure, political protests, and civil war. I find that oil wealth is robustly associated with increased regime durability, even when controlling for repression, and with lower likelihoods of civil war and antistate protest. I also find that neither the boom nor bust periods exerted any significant effect on regime durability in the states most dependent on exports, even while those states saw more protests during the bust. In short, oil wealth has generally increased the durability of regimes, and repression does not account for this effect. Future research focused on the origins of robust coalitions in oil-rich states is most likely to provide fruitful explanations to this puzzle.
There is growing evidence that the primary effect of energy price shocks on the U.S. economy involves a reduction in consumer spending. We quantify the direct effect on real consumption of unanticipated changes in discretionary income, shifts in precautionary savings, and changes in the operating cost of energy-using durables. The possibility of asymmetries in the response of real consumption to energy price shocks is also considered. We demonstrate that linear models are consistent with the symmetric behavior of real consumption in 1979 (when energy prices increased sharply) and in 1986 (when they fell sharply). It is shown that historically energy price shocks have been an important factor in explaining U.S. real consumption growth, but by no means the dominant factor.
This paper uses a flexible approach to characterize the nonlinear relation between oil price changes and GDP growth. The paper reports clear evidence of nonlinearity, consistent with earlier claims in the literature—oil price increases are much more important than oil price decreases, and increases have significantly less predictive content if they simply correct earlier decreases. An alternative interpretation is suggested based on estimation of a linear functional form using exogenous disruptions in petroleum supplies as instruments.
This paper summarizes and extends previous research that has shown evidence of a “curse of natural resources” – countries with great natural resource wealth tend nevertheless to grow more slowly than resource-poor countries. This result is not easily explained by other variables, or by alternative ways to measure resource abundance. This paper shows that there is little direct evidence that omitted geographical or climate variables explain the curse, or that there is a bias resulting from some other unobserved growth deterrent. Resource-abundant countries tended to be high-price economies and, perhaps as a consequence, these countries tended to miss-out on export-led growth.
Many of the quarterly oil price increases observed since 1985 are corrections to even bigger oil price decreases the previous quarter. When one looks at the net increase in oil prices over the year, recent data are consistent with the historical correlation between oil shocks and recessions.
Strong evidence is found that oil prices no longer Granger cause many U.S. macroeconomic indicator variables in data after 1973. A number of potential explanations are explored: that sample stability issues are responsible, that oil prices are now endogenous, and that linear and symmetric specifications misrepresent the form of the oil price interaction. None of these hypotheses are supported by the data. The OPEC price increases do appear to have had significant impacts, while the effects of the price declines of the 1980s are smaller and harder to characterize. These results have potentially important implications for the large body of research which utilizes oil prices as an instrumental or explanatory variable.
Since Bernanke, Gertler and Watson (1997), a common view in the literature has been that systematic monetary policy responses to the inflation triggered by oil price shocks are an important source of aggregate fluctuations in the U.S. economy. We show that there is no evidence of systematic monetary policy responses to oil price shocks after 1987 and that this lack of a policy response is unlikely to be explained by reduced real wage rigidities. Prior to 1987, according to standard VAR models, the Federal Reserve was not responding to the inflation triggered by oil price shocks, as commonly presumed, but rather to the oil price shocks directly, consistent with a preemptive move by the Federal Reserve to counteract potential inflationary pressures. There are indications that this response is poorly identified, however, and there is no evidence that this policy response in the pre-1987 period caused substantial fluctuations in the Federal Funds rate or in real output. Our analysis suggests that the traditional monetary policy reaction framework explored by BGW and incorporated in subsequent DSGE models should be replaced by DSGE models that take account of the endogeneity of the real price of oil and that allow policy responses to depend on the underlying causes of oil price shocks.
A recent paper by Bernanke, Gertler and Watson (1997) suggests that monetary policy could be used to eliminate any recessionary consequences of an oil price shock. This paper challenges that conclusion on two grounds. First, we question whether the Federal Reserve actually has the power to implement such a policy; for example, we consider it unlikely that additional money creation would have succeeded in reducing the Fed funds rate by 900 basis points relative to the values seen in 1974. Second, we point out that the size of the effect that Bernanke, Gertler and Watson attribute to oil shocks is substantially smaller than that reported by other researchers, primarily due to their choice of a shorter lag length than used by other researchers. We offer evidence in favor of the longer lag length employed by previous research, and show that, under this specification, even the aggressive Federal Reserve policies proposed would not have succeeded in averting a downturn.
Rotemberg and Woodford (1996) present new striking facts concerning the effects of energy price increases on economic activity. They advance a theory of imperfect competition to successfully address these facts--suggesting that imperfect competition is a necessary ingredient for success. The present study shows that a theory of perfect competition rises to the challenge of explaining the Rotemberg-Woodford evidence.
This paper presents a unified approach to impulse response analysis which can be used for both linear and nonlinear multivariate models. After discussing the advantages and disadvantages of traditional impulse response functions for nonlinear models, we introduce the concept of a generalized impulse response function which, we argue, is applicable to both linear and nonlinear models. We develop measures of shock persistence and asymmetric effects of shocks derived from the generalized impulse response function. We illustrate the use of these measures for a nonlinear bivariate model of US output and the unemployment rate.
The paper examines the performance of four multivariate volatility models, namely CCC, VARMA-GARCH, DCC and BEKK, for the crude oil spot and futures returns of two major benchmark international crude oil markets, Brent and WTI, to calculate optimal portfolio weights and optimal hedge ratios, and to suggest a crude oil hedge strategy. The empirical results show that the optimal portfolio weights of all multivariate volatility models for Brent suggest holding futures in larger proportions than spot. For WTI, however, DCC and BEKK suggest holding crude oil futures to spot, but CCC and VARMA-GARCH suggest holding crude oil spot to futures. In addition, the calculated optimal hedge ratios (OHRs) from each multivariate conditional volatility model give the time-varying hedge ratios, and recommend to short in crude oil futures with a high proportion of one dollar long in crude oil spot. Finally, the hedging effectiveness indicates that DCC (BEKK) is the best (worst) model for OHR calculation in terms of reducing the variance of the portfolio.
Using a newly developed measure of global real economic activity, a structural decomposition of the real price of crude oil in four components is proposed: oil supply shocks driven by political events in OPEC countries; other oil supply shocks; aggregate shocks to the demand for industrial commodities; and demand shocks that are specific to the crude oil market. The latter shock is designed to capture shifts in the price of oil driven by higher precautionary demand associated with concerns about the availability of future oil supplies. The paper quantifies the magnitude and timing of these shocks, their dynamic effects on the real price of oil and their relative importance in determining the real price of oil during 1975-2005. The analysis also sheds light on the origins of the major oil price shocks since 1979. Distinguishing between the sources of higher oil prices is shown to be crucial for assessing the effect of higher oil prices on U.S. real GDP and CPI inflation. It is shown that policies aimed at dealing with higher oil prices must take careful account of the origins of higher oil prices. The paper also quantifies the extent to which the macroeconomic performance of the U.S. since the mid-1970s has been determined by the external economic shocks driving the real price of oil as opposed to domestic economic factors and policies.
Do oil prices help forecast us real GDP? the role of nonlinearities and asymmetries
- Kilian
Nonlinearities in the oil price–output relationship
- Kilian