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 macroeconomic effects of oil price fluctuations on a small open oil-producing country: The case of Trinidad and Tobago

Using vector autoregressive (VAR) methodology, this paper empirically investigates the macroeconomic effects of oil price fluctuations on Trinidad and Tobago. Overall, we find that the price of oil is a major determinant of economic activity of the country. Our impulse response functions suggest that following a positive oil price shock, output falls within the first two years followed by positive and growing response. We also investigate the macroeconomic impact of oil price volatility. Results suggest that an unanticipated shock to oil price volatility brings about random swings in the macroeconomy; however, only government revenue and the price level exhibit significant responses. With regard to the magnitude of the responses, shocks to oil price volatility tend to yield smaller macroeconomic impacts in comparison to shocks to oil prices. Variance decompositions suggest that the price of oil is a major component of forecast variation for most macroeconomic variables. Finally, Granger-causality tests indicate causality from oil prices to output and oil prices to government revenue.     

Oil prices and current account: A structural analysis for the Turkish economy

Although there has been an increasing number of studies about the effects of oil prices on the macroeconomic performances, the literature on the interaction between oil prices and current account is limited, especially for oil importing developing countries. This paper analyzes the impact of oil prices on the current account balances for the Turkish economy using a structural vector autoregression model. Our model allows us to identify the net effect of oil prices on current account balances after controlling for other factors such as output gap and exchange rate misalignment. The results show that the response of current account ratio to oil price shock increases gradually up to the first three months and then starts to decrease, which indicates a significant effect of oil price shocks in the short-run. Moreover, when the obtained structural shocks are employed in a simple regression analysis, the parameter regarding the oil price shocks is found to be negative and statistically significant. The final section discusses the policy implications of the results.     

The impact of oil price shocks in the Canadian economy: A structural investigation on an oil-exporting economy

Oil price shocks and monetary policy response by oil producing economies have been the subject of important theoretical investigation in the modern literature. This topic seems to be well grounded since fluctuations in the US dollar, which is affected by US monetary policy, plays an important role in exacerbating run ups and precipitous falls in world oil prices. We investigate the economic consequences of oil price shocks using an open-economy DSGE model that incorporates demand for and supply of oil while allowing for interaction between domestic and foreign monetary policy. Using Canadian and U.S. data, we quantify the relative importance of oil price shocks and monetary policy response on macroeconomic variables. We show that domestic monetary policy is a key channel that accounts for over 40% of discounted variation in domestic output across a 4-year horizon after an oil shock. In contrast, US monetary policy is of lesser importance in propagating oil price shocks on an oil-exporting economy through the international channel.     

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.     

Dynamic impacts of high oil prices on the bioethanol and feedstock markets

This study investigates the impacts of high international oil prices on the bioethanol and corn markets in the US. Between 2007 and 2008, the prices of major grain crops had increased sharply, reflecting the rise in international oil prices. These dual price shocks had caused substantial harm to the global economy. Employing a structural vector auto-regression model (SVAR), we analyze how increases in international oil prices could impact the prices of and demand for corn, which is used as a major bioethanol feedstock in the US. The results indicate that an increase in the oil price would increase bioethanol demand for corn and corn prices in the short run and that corn prices would stabilize in the long run as corn exports and feedstock demand for corn decline. Consequently, policies supporting biofuels should encourage the use of bioethanol co-products for feed and the development of marginal land to mitigate increases in the feedstock price.     

The impact of commodity price shocks in the presence of a trading relationship: A GVAR analysis of the NAFTA

This paper investigates the commodity price shocks and monetary shocks in the region covered by the North American Free Trade Agreement (NAFTA), using a global vector autoregression (GVAR) approach. Our focus is on commodity price shocks which impact both directly through the aggregate price level, as well as through monetary policy related aggregates such as short-term interest rates. We first contrast the response of the real economy to commodity price shocks in two periods: 1983Q2–2015Q2 and 1994Q1–2015Q2, where the beginning of the second sample coincides with a statistically identified structural break, as well as the introduction of NAFTA. The results indicate that the commodity price shocks, such as for oil and metal, have a bigger impact on the real economy after NAFTA came into force, with metal prices having a larger quantitative impact on output in comparison to oil prices. Next, we investigate whether these changes have different implications for the impact of domestic monetary shocks in the three countries. We find that while the post-NAFTA period is characterized by a stronger domestic monetary policy response to commodity price shocks, the response to monetary shocks per se varies in the two time periods. In particular U.S. monetary policy, as reflected in shocks to short-term interest rates, has a weaker influence in the post-NAFTA period. Overall, the influence of global, commodity price shocks in the region relative to domestic monetary shocks is greater in the post-NAFTA period.     

Another perspective on gasoline price responses to crude oil price changes

The effects of oil price volatility on the responses of gasoline prices to oil price shocks have received little attention in discussions on the relationship between the prices of crude oil and gasoline. In this paper we consider such effects by using a bivariate structural vector autoregression which is modified to accommodate GARCH-in-mean errors. Our measure of oil price volatility is the conditional variance of the oil price–change forecast error. We isolate the effects of volatility in the price of oil on the price of gasoline and employ simulation methods to calculate nonlinear impulse response functions (NIRFs) to trace any asymmetric effects of independent oil price shocks on the conditional means of gasoline prices. We test whether the relationship between the prices of crude oil and gasoline is symmetric using tests of the null hypothesis of symmetric impulse responses. Based on monthly U.S. data over the period from 1978:1 to 2014:11, our empirical results show that gasoline prices respond asymmetrically to positive and negative oil price shocks. We also find that oil price volatility has a positive effect on the price of gasoline and it contributes to the asymmetries in the transmission of oil price shocks.     

Dynamic fuel price pass-through: Evidence from a new global retail fuel price database

We estimate the dynamic effects of crude oil price shocks on retail fuel prices, the pass-through, using the local projection approach of Jordà (2005). Using a novel monthly dataset of retail fuel prices in 162 countries over the period from 2000:1 to 2014:12, we find that: (i) retail gasoline prices respond positively to crude oil price shocks, but the responses vary across regions and income groups; (ii) there is also some variation across country groups in the persistence of the effects of crude oil price shocks on retail gasoline prices; and (iii) declines in crude oil prices lead to smaller effects on retail gasoline prices than increases in crude oil prices, pointing to an asymmetry in the fuel price pass-through.     

Oil price uncertainty in Canada

Bernanke [Bernanke, Ben S. Irreversibility, uncertainty, and cyclical investment. Quarterly Journal of Economics 98 (1983), 85–106.] shows how uncertainty about energy prices may induce optimizing firms to postpone investment decisions, thereby leading to a decline in aggregate output. Elder and Serletis (Elder, John and Serletis, Apostolos. Oil price uncertainty. http://ssrn.com/abstract=908675 (2009).] find empirical evidence that uncertainty about oil prices has tended to depress investment in the United States. In this paper we assess the robustness of these results by investigating the effects of oil price uncertainty in Canada. Our results are remarkably similar to existing results for the United States, providing additional evidence that uncertainty about oil prices may provide another explanation for why the sharp oil price declines of 1985 failed to produce rapid output growth. Impulse-response analysis suggests that uncertainty about oil prices may tend to reinforce the negative response of output to positive oil shocks.     

Are the macroeconomic effects of oil price shock symmetric?: A Factor-Augmented Vector Autoregressive approach

This paper aims to examine the asymmetric effect of oil price shocks on real economic activity in the U.S. within the context of a nonlinear Factor-Augmented Vector Autoregressive (FAVAR) model. By employing simulation methods, we trace the effects of positive and negative oil price shocks on the macroeconomic variables through the Impulse Response Function (IRF). It is found that the negative impacts of higher oil prices are larger than the positive effects of lower oil prices. And the asymmetric effects are more evident when the oil price shocks are larger. The results are robust to different lag specification and choice of factors.     

Does the source of oil price shocks matter for South African stock returns? A structural VAR approach

In this paper, we investigate the dynamic relationship between different oil price shocks and the South African stock market using a sign restriction structural VAR approach for the period 1973:01 to 2011:07. The results show that for an oil-importing country like South Africa, stock returns only increase with oil prices when global economic activity improves. In response to oil supply shocks and speculative demand shocks, stock returns and the real price of oil move in opposite directions. The analysis of the variance decomposition shows that the oil supply shock contributes more to the variability in real stock prices. The main conclusion is that different oil price shocks affect stock returns differently and policy makers and investors should always consider the source of the shock before implementing a policy and making investment decisions.     

The impact of diesel price on upstream and downstream food prices: Evidence from São Paulo

The literature on the transmission of oil price shocks to prices along the food supply chain has widely ignored how shocks upstream differ from downstream ones. This article examines this issue by modelling upstream and downstream diesel price shocks along the nutritional high-value food supply chain in São Paulo. Using a Vector Error Correction approach and monthly data from July 2001 to December 2013, we estimate short-run and long-run dynamics in producer and retail prices of meat, eggs, dairy and fats & oil due to changes in the average monthly price of diesel. The results of the Granger causality analysis show that the price of diesel cannot be used to predict the behaviour of producer prices in all the markets under study, and the price of diesel predicts retail price only in the egg market. This result is in line with the nature of price controls in Brazil. As of January 2002, the prices charged by distributors and retailers have been liberalized, although wholesale prices of the derivatives, including that of diesel, continue to be set by the state oil company with the objective of controlling inflationary pressures. The results of the response of food prices to diesel price shocks show a positive response of both upstream and downstream prices of egg and dairy products both upstream and downstream, while the opposite direction occurs in the fat and meat markets albeit the initial positive shock of the producer price of meat. The findings of the study show the important role of public policy in determining the nature of price transmission along the food supply chain.     

The asymmetric response of gasoline prices to oil price shocks and policy uncertainty

This study shows that the effect of oil price shocks on the real price of gasoline is interrelated with economic policy uncertainty. Economic policy shocks are linked with increased real price of gasoline and reduced consumption of gasoline. There is evidence that the fluctuation of both real gasoline prices and of gasoline consumption is associated with uncertainty of tax legislation expiration expectation as well as other components of economic policy uncertainty. Positive shocks to economic policy uncertainty have relatively larger effects on gasoline prices than do negative shocks to economic policy uncertainty. Economic policy uncertainty responds asymmetrically to increases and decreases in real oil price. Shocks to economic policy uncertainty account for 16.1% of variation in real gasoline prices and for 4.9% of variation in gasoline consumption in the long-run.     

Relationships between oil price shocks and stock market: An empirical analysis from China

This paper investigates the interactive relationships between oil price shocks and Chinese stock market using multivariate vector auto-regression. Oil price shocks do not show statistically significant impact on the real stock returns of most Chinese stock market indices, except for manufacturing index and some oil companies. Some “important” oil price shocks depress oil company stock prices. Increase in oil volatility may increase the speculations in mining index and petrochemicals index, which raise their stock returns. Both the world oil price shocks and China oil price shocks can explain much more than interest rates for manufacturing index.     

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.     

Exchange rate of the US dollar and the J curve: the case of oil exporting countries

This study examines the effects of changes in the exchange rate of the US dollar on the trade balances of three oil-exporting countries, namely Iran, Venezuela and Saudi Arabia. An exchange rate pass-through model is applied to allow changes in the exchange rate of the dollar to affect prices of traded goods. Then, the impact of changes in prices on the quantities of imports and exports of these economies is estimated. The results suggest a partial exchange rate pass-through to these countries’ import and export prices in terms of the US dollar. While the three countries raise the price of their primary export (namely crude oil) in response to a depreciation of the dollar, Saudi Arabia's long-run pricing strategy in securing a larger market share stands in contrast to that of the two other OPEC members. The sum of the estimated long-run price elasticities of demand for imports and exports is found to exceed unity for Iran and Venezuela, but less than unity for Saudi Arabia.     

Oil price uncertainty and unemployment

In this study, we empirically search the effects of oil price uncertainty and oil price shocks on U.S. unemployment rate using a GARCH-in-mean VAR model for the period 1974:q2–2017:q4. Based on our findings, we show that oil price uncertainty significantly increases unemployment rate in the U.S. economy. Likewise, our impulse-response analysis affirms that a positive oil price shock increases unemployment while the response of unemployment to a negative oil price shock is negative. Moreover, we reveal that unemployment rate reacts to positive and negative shocks asymmetrically. More specifically, the response of unemployment to negative oil price shocks is negative and slighter in size. Besides, oil price uncertainty is found to magnify the rise in the U.S. unemployment rate. These findings are in keeping with the real options theory which reveals that the uncertainty about goods' prices leads firms to postpone or abandon their production and investment and they seem to be robust to the use of different real oil price measures.     

Oil price shocks and agricultural commodity prices

While the impacts of oil price changes on agricultural commodity markets are of great interest to economists, previous studies do not differentiate oil-specific shocks from aggregate demand shocks. In this paper, we address this issue using a structural VAR analysis. Our findings indicate that the responses of agricultural commodity prices to oil price changes depend greatly on whether they are caused oil supply shocks, aggregate demand shocks or other oil-specific shocks mainly driven by precautionary demand. Oil shocks can explain a minor friction of agricultural commodity price variations before the food crisis in 2006–2008, whereas in post-crisis period their explanatory abilities become much higher. After crisis, the contributions of oil-specific factors to variations in agricultural commodity prices are greater than those of aggregate demand shocks. The results from an alternative SVAR confirm the robustness of our main findings.     

The resilience of the Indian economy to rising oil prices as a validation test for a global energy–environment–economy CGE model

This paper proposes to test the global hybrid computable general equilibrium model Imaclim-R against macroeconomic data. To do so, it compares the modeled and observed responses of the Indian economy to the rise of oil price during the 2003–2006 period. The objective is twofold: first, to disentangle the various mechanisms and policies at play in India's economy response to rising oil prices and, second, to validate our model as a tool capable of reproducing short-run statistical data. With default parameterization, the model predicts a significant decrease in the Indian growth rate that is not observed. However, this discrepancy is corrected if three additional mechanisms identified by the International Monetary Fund are introduced, namely the rise in exports of refined oil products, the imbalance of the trade balance allowed by large capital inflows, and the incomplete pass-through of the oil price increase to Indian customers. This work is a first step toward model validation, and provides interesting insights on the modeling methodology relevant to represent an economy's response to a shock, as well as on how short-term mechanisms – and policy action – can smooth the negative impacts of energy price shocks or climate policies.