The relationship between global oil price shocks and China's output: A time-varying analysis

We employ a class of time-varying Bayesian vector autoregressive (VAR) models on new standard dataset of China's GDP constructed by Chang et al. (2015) to examine the relationship between China's economic growth and global oil market fluctuations between 1992Q1 and 2015Q3. We find that: (1) the time varying parameter VAR with stochastic volatility provides a better fit as compared to it's constant counterparts; (2) the impacts of intertemporal global oil price shocks on China's output are often small and temporary in nature; (3) oil supply and specific oil demand shocks generally produce negative movements in China's GDP growth whilst oil demand shocks tend to have positive effects; (4) domestic output shocks have no significant impact on price or quantity movements within the global oil market. The results are generally robust to three commonly employed indicators of global economic activity: Kilian's global real economic activity index, the metal price index and the global industrial production index, and two alternative oil price metrics: the US refiners' acquisition cost for imported crude oil and the West Texas Intermediate price of crude oil.     

The roles of inter-fuel substitution and inter-market contagion in driving energy prices: Evidences from China’s coal market

Coal has been dominating energy supply and consumption in China, with the country becoming the largest energy supplier and consumer worldwide. Due to inter-fuel substitution of crude oil and inter-market contagion of international coal market, China's coal price might be interrelated with crude oil price and international coal price. However, the precise roles of these two effects in determining China's coal price are unknown. This paper contributes to previous literature by investigating this issue. We find that co-movements between China's coal price and crude oil price largely hinge on the shares of oil and coal in China’s energy mix, while its co-movements with international coal price depend on scales of coal trade. Inter-fuel substitution dominated the interaction of China's coal market with other energy types, but the importance of inter-market contagion has been increasing. We also find that China might have become an originator for driving the returns of crude oil and international coal, in particular after 2008. Furthermore, China's coal market is still a net volatility recipient for shocks from both crude oil market and international coal market. Given the increased integration of global energy markets, we anticipate this paper to provide a better understanding on the dynamic changes in China's coal prices.     

How do oil price shocks affect the output volatility of the U.S. energy mining industry? The roles of structural oil price shocks

This paper focuses on how explicit structural shocks that characterize the endogenous character of international oil price change affect the output volatility of the U.S. crude oil and natural gas mining industries. To this end, we employ a modified structural vector autoregressive model (SVAR) to decompose real oil-price changes into four components: U.S. supply shocks, non-U.S. supply shocks, aggregate demand shocks, and oil-specific demand shocks mainly driven by precautionary demand. The results indicate that output volatility of the U.S. crude oil and natural gas mining industry has significantly negative responses to U.S. supply shocks, aggregate demand shocks, and oil-specific demand shocks, while lacks significant response to non-U.S. supply shocks. Variance decomposition and historical decomposition confirm that U.S. supply shocks occupy most explaining variations in output volatility among the four structural oil shocks. Moreover, the oil-specific demand shocks explain more variation than that of aggregate demand shocks for the crude oil mining industry, but the opposite is true for the natural gas mining industry.     

Recent drivers of the real oil price: Revisiting and extending Kilian's (2009) findings

We replicate and update the results of Kilian (2009) to include the period since the financial crisis. We separate the drivers of the price of crude oil shocks into three components: oil supply shocks, aggregate demand shocks and oil-market specific demand shocks. We provide evidence that the run-up of oil prices in 2008 was mostly driven by aggregate demand shocks and to a lesser extend by oil-market specific demand shocks, complementing similar analyses in Baumeister and Kilian (2016a) and Kilian (2017). Our results confirm that the cumulative effect of aggregate demand disruptions on the price of crude oil started before 2007. Furthermore, aggregate demand shocks and oil-market specific demand shocks rather than oil supply shocks have the most significant effects on U.S. output and prices. The findings are robust to an alternative measure of global real economic activity.     

Assessing the impact of US ethanol on fossil fuel markets: A structural VAR approach

Despite the growing importance of biofuels, the effect of biofuels on fossil fuel markets is not fully understood. We develop a joint structural Vector Auto Regression (VAR) model of the global crude oil, US gasoline, and US ethanol markets to examine whether the US ethanol market has had any impact on global oil markets. The structural VAR approach provides a unique method for decomposing price and quantity data into demand and supply shocks, allowing us to estimate the distinct dynamic effects of ethanol demand and supply shocks on the real prices of crude oil and US gasoline. Ethanol demand in the US is driven mainly by government support in the form of tax credits and blending mandates. Shocks to ethanol demand therefore reflect changes in policy more than any other factor. In contrast, ethanol supply shocks are driven by changes in feedstock prices. A principle finding is that a policy-driven ethanol demand expansion causes a statistically significant decline in real crude oil prices, while an ethanol supply expansion does not have a statistically significant impact on real oil prices. This suggests that even though US ethanol market is small, the influence of US biofuels policy on the crude oil market is pervasive. We also show that ethanol demand shocks are more important than ethanol supply shocks in explaining the fluctuation of real prices of crude oil and US gasoline.     

How does the U.S. natural gas market react to demand and supply shocks in the crude oil market?

In this paper we use monthly data (over the period from January 1976 to December 2012) and a structural VAR model to disentangle demand and supply shocks in the global crude oil market and investigate their effects on the real price of natural gas in the United States. We identify the model by assuming that innovations to the real price of crude oil are predetermined with respect to the natural gas market and show that close to 45% of the variation in the real price of natural gas can be attributed to structural supply and demand shocks in the global crude oil market.     

Macroeconomic impacts of oil price shocks in Asian economies

This paper analyzes the macroeconomic impact of structural oil shocks in four of the top oil-consuming Asian economies, using a VAR model. We identify three different structural oil shocks via sign restrictions: an oil supply shock, an oil demand shock driven by global economic activity and an oil-specific demand shock. The main results suggest that economic activity and prices respond very differently to oil price shocks depending on their types. In particular, an oil supply shock has a limited impact, while a demand shock driven by global economic activity has a significant positive effect in all four Asian countries examined. Our finding also includes that policy tools such as interest rates and exchange rates help mitigating the effects of supply shocks in Japan and Korea; however, they can be more actively used in response to demands shocks.     

Do exchange rates respond asymmetrically to shocks in the crude oil market?

The paper argues that exchange rates respond asymmetrically to different shocks to the crude oil market. We apply Kilian's (2009) methodology to disentangle shocks to the crude oil market into distinct demand and supply shocks, and examine the response of the U.S. real and nominal trade-weighted U.S. dollar exchange rate indexes, as well as six other bilateral exchange rates to these shocks. Our analysis indicates that oil supply shocks have no significant effects on exchange rates, while global aggregate demand and oil-specific demand shocks lead to depreciations. We further show that exchange rates respond asymmetrically to shocks in the crude market depending on whether the shocks are large versus small, or positive versus negative.     

Oil price shocks and China's economy: Reactions of the monetary policy to oil price shocks

The paper empirically analyzes the effect of positive oil price shocks on China's economy, having special interest in the response of the Chinese interest rate to those shocks. Using different econometric models, i) a time-varying parameter structural vector autoregression (TVP SVAR) model with short-run identifying restrictions, ii) a structural VAR (SVAR) model with the short-run identifying restrictions, and iii) a VAR model with ordering-free generalized impulse response VAR (GIR VAR), we find that the response of the Chinese interest rate to the oil price shocks is not only time-varying but also showing quite different signs of responses. Specifically, in the earlier sample period (1992:4–2001:10), the interest rate shows a negative response to the oil price shock, while in the latter period (2001:11–2014:5) it shows a positive response to the shock. Given the negative response of the world oil production to an oil price shock in the earlier period, the shock is identified as a negative supply shock or a precautionary demand shock as suggested by Kilian (2009), thereby the negative response of the interest rate to the oil price shock is deemed as economy-boosting. The positive response of the interest rate to the oil price shock in the later period, given that this shock is identified as a positive world oil demand shock, gives evidence that stabilization of inflation is one of the main objectives of China's monetary authority, even though the current main objective of the monetary policy is characterized as “maintaining the stability of the value of the currency and thereby promoting economic growth.” Finally, the variance decomposition results reveal that the oil price shock becomes an increasingly important source in the volatility of China's interest rate.     

Expectations, learning, and the changing relationship between oil prices and the macroeconomy

This paper estimates a structural general equilibrium model to investigate the changing relationship between the oil price and macroeconomic variables. The oil price, through the role of oil in production and consumption, affects aggregate demand and supply in the model. The assumption of rational expectations is relaxed in favor of learning. Oil prices, therefore, affect the economy through an additional channel, i.e. through their effect on the formation of agents' beliefs.The estimated learning dynamics indicates that economic agents' perceptions about the effects of oil prices on the economy have changed over time: oil prices were perceived to have large effects on output and inflation in the 1970s, but only milder effects after the mid-1980s. Since expectations play a large role in the determination of output and inflation, the effects of oil price increases on expectations can magnify the response of macroeconomic variables to oil price shocks. In the estimated model, in fact, the implied responses of output and inflation to oil price shocks were much more pronounced in the 1970s than in 2008. Therefore, through the time variation in the impact of oil prices on beliefs, the paper can successfully explain the observed weakening of the effects of oil price shocks on real activity and inflation.     

The effects of oil price shocks on the Iranian economy

The Iranian economy is highly vulnerable to oil price fluctuations. This paper analyzes the dynamic relationship between oil price shocks and major macroeconomic variables in Iran by applying a VAR approach. The study points out the asymmetric effects of oil price shocks; for instance, positive as well as negative oil price shocks significantly increase inflation. We find a strong positive relationship between positive oil price changes and industrial output growth. Unexpectedly, we can only identify a marginal impact of oil price fluctuations on real government expenditures. Furthermore, we observe the ”Dutch Disease” syndrome through significant real effective exchange rate appreciation.     

The effect of global oil price shocks on China's metal markets

This paper investigated the impacts of global oil price shocks on the whole metal market and two typical metal markets: copper and aluminum. We applied the autoregressive conditional jump intensity (ARJI) model, combining with the generalized conditional heteroscedasticity (GRACH) method, to describe the volatility process and jump behavior in the global oil market. We separated the oil price shocks into positive and negative parts, to analyze whether oil price volatility had symmetric impacts on China’s metal markets. We further used the likelihood ratio test to examine the symmetric effect of oil price shocks. In addition, we considered the jump behavior in oil prices as an input factor to investigate how China’s metal markets are affected when jumps occur in the global oil market, in contrast to the existing research paying little attention to this issue. Our results indicate that crude oil price shocks have significant impacts on China's metal markets and the impacts are symmetric. When compared with aluminum, copper is more easily affected by oil price shocks.     

World crude oil and natural gas: a demand and supply model

This paper examines world markets for crude oil and natural gas over the period 1918–1999; it analyzes the time-series properties of output and prices and estimates demand and supply elasticities during 1918–1973 and 1973–1999. Oil and gas prices were stable during the first period; they became volatile afterwards, reflecting deep changes in the market structure following the oil shock in 1973. Demand price elasticities were too low; however, demand income elasticities were high. Supply price elasticities were also too low. The elasticity estimates help to explain the market power of the oil producers and price volatility in response to shocks, and corroborate elasticity estimates in energy studies.     

An empirical analysis of the relationship between oil prices and the Chinese macro-economy

Using the quarterly data from the first quarter of 1996 to the fourth quarter of 2014, this paper studies the relationship between oil prices and the Chinese macro-economy. We find output and interest rate respond significantly to oil price shocks. Further analysis reveals that the positive response of output to oil price shocks is attributed to the influences of oil price shocks on exports. The oil price shocks have both longer and deeper effects on the exports of state-owned enterprises than on those of foreign investment enterprises. Moreover, the response of exports to oil price shocks is symmetric. Finally, oil prices are found to be useful for forecasting the China's exports in the periods shorter than about two years.     

Oil shocks and financial systemic stress: International evidence

By conducting a structural VAR analysis on the financial systemic stress in 20 countries, this paper provides international evidence that oil structural shocks impact not only stress in individual financial markets but also their connectedness. The oil structural shocks explain a large fraction of the variation in the connectedness among various financial markets. The effect of oil structural shocks on financial systemic stress is largely dependent on the origins of oil price changes and a country's net oil export position. In most oil importing economies, financial systemic stress is negatively impacted by supply and aggregate demand shocks and positively impacted by oil-market specific demand shocks. Opposite patterns are detected in oil exporting economies. The effects of the spillovers are asymmetrically related with market conditions: During normal periods, more risks are spilled over from the oil market to financial systems, but during financial crises, the opposite occurs. In periods of financial crises and oil price collapses, there is noticeable contagion between the oil market and financial systems.     

Oil price shocks,global financial markets and their connectedness

This paper extends the literature on the relationship between oil price shocks and financial markets by examining the effect of oil shocks on the sovereign bond markets of a large number of advanced and emerging economies and exploring the impact of oil shocks on the degree of connectedness among international financial markets. We show that the effect of oil price shocks is not only limited to stock market returns, but also extends to bond markets, even after controlling for discount rate shocks as well as aggregate capital market effects. Unlike the case for stock markets, the effect on sovereign bonds is found to be rather heterogeneous (in terms of size and sign) and primarily driven by demand related shocks. We also show that oil price shocks serve as a driver of connectedness patterns across global financial markets, although the effect on connectedness depends on the nature of the oil market shock and the economic characteristics of the countries. Overall, the findings highlight the role of crude oil as a driver of not only of return dynamics in global stock and bond markets, but also of global financial connectedness patterns.     

Oil prices,fundamentals and expectations

This paper empirically investigates the relationship between oil prices, traditional fundamentals and expectations. Informational frictions may force a wedge between oil prices and supply and/or demand shocks, especially during periods of elevated risk aversion and uncertainty. In such a context, expectations can be a key driver of oil price movements and their impact can vary over time. Overall, we find that both traditional oil fundamentals and forward-looking expectations matter for oil prices. Our findings show that the real price of oil responds differently to expectations shocks of business leaders, consumers and aggregate markets. Our TVP-VAR approach provides evidence that business leaders' expectations play an important role in terms of oil price fluctuations and the impact is stronger in periods of elevated global oil demand. In terms of traditional oil market fundamentals, we find that oil prices have been significantly affected by the recent US shale oil boom. Moreover, global oil demand had a positive impact upon oil prices, especially from the mid-2000s. Several alternative model specifications prove the robustness of our analysis.     

Turbulent times: Uncovering the origins of US natural gas price fluctuations since deregulation

In this paper, we investigate supply and demand shocks in the U.S. natural gas market, focusing on how the effects of these shocks have changed over time. Using a sign-identified structural vector autoregression (SVAR) model that allows for both time-varying parameters and stochastic volatility, we find that supply and demand shocks are the main drivers of natural gas price fluctuations during 1993–2015, with speculative activities playing a minor role during a portion of the sample period. We also find that after the recent shale boom, the supply and demand of natural gas in the US have become somewhat more elastic. An examination of several volatile episodes during the sample period suggest that though natural gas price fluctuations are predominately determined by fundamental factors, supply and demand shocks have significantly evolved over time.     

Dynamic connectedness of oil price shocks and exchange rates

Using a novel method of isolating the oil price shocks, we study how different sources of oil price shocks are connected to exchange rates of major oil-dependent countries using daily data from March 1996 to February 2019. We find that oil price shocks resulting from changes in demand and risk significantly contribute to variation in exchange rates, while supply shocks have virtually no impact. The connectedness of this relationship between oil price shocks and exchange rates has significantly increased after the global financial crisis. We also find that oil price shocks do not explain the variation in exchange rate volatility but we document significant volatility connectedness among exchange rates. Our findings have important implications for policy makers and financial market participants.     

The dynamic linkages between crude oil and natural gas markets

The time varying price spillovers between natural gas and crude oil markets for the period 1994 to 2014 are investigated. Contrary to earlier research, we show that in a large part of our sample the natural gas price leads the price of crude oil with price spillover effects lasting up to two weeks. This result is robust to a battery of tests including out-of-sample forecasting exercises. However, after 2006, we detect little price dependencies between these two energy commodities. These findings arise due to a conjunction of both demand and supply-side shocks arising from both natural and economic events, including Hurricane Katrina, the Tohoku earthquake and the Global Financial Crisis, as well as infrastructure and technological improvements. The increased use of new technologies such as hydraulic fracking for the extraction of gas and oil in particular affected supply in the latter part of the study. We conclude that the long term relation present in the early part of the sample has decoupled, such that price determination of these two energy sources is now independent.