Role of oil price shocks on macroeconomic activities: An SVAR approach to the Malaysian economy and monetary responses

This study examines the impact of oil price uncertainty on Malaysian macroeconomic activities and monetary responses. We use a structural VAR (SVAR) model based on monthly data over the period 1986−2009. The EGARCH model estimates show an important asymmetric effect of oil price shocks on the conditional oil price volatility. Dynamic impulse response functions obtained from the SVAR model show a prolonged dampening effect of oil price volatility shock on Malaysian industrial production. We also find that levels of Consumer Price Index (CPI) decline with a positive shock to oil price uncertainty. This is the result of negative demand shock due to the postponement of consumption of big ticket items by individuals, households and other sectors of the economy. We also found that the Malaysian central bank adopts an expansionary monetary policy in response to oil price uncertainty. Variance decomposition analysis reconfirms that volatility in the oil price is the second most important factor to explain the variance of industrial production after its own shocks. These results shed some light on how the central bank of Malaysia can use controlling mechanisms to stabilize aggregate output and price level.     

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.     

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.     

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.     

Dynamic relationship of oil price shocks and country risks

This study investigates the dynamic relationship between oil price shocks and country risks using a Structural VAR framework for a sample of both net oil-exporting and net oil-importing countries over the period January 1994–December 2014. The results reveal that country risk is significantly affected by oil price shocks, but the impacts are different. Unanticipated positive oil price shocks trigger a reduction (addition) in country risk for net oil-exporting country (net oil-importing countries). As to the responses of oil prices to country risk shock, evidence show that country risk shocks have a delayed significantly positive impacts on oil price for oil-exporting country. With respect to the effects of subcomponents of country risk, we find evidence that economic and political risk have a significant impact on supply-side shocks in net oil-exporting countries like Canada, while economic and political risk have a significant effect on supply-side shocks and oil specific demand shocks in net oil-importing countries like the US. These results are particularly important to policy makers and government.     

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.     

How is volatility in commodity markets linked to oil price shocks?

This study investigates the effects of oil price shocks on volatility of agricultural and metal commodities. We decompose an oil price shock to its underlying components, including macroeconomics and oil specific shocks. The applied method is the structural vector autoregressive (SVAR) model and the time span is from April 1983 to May 2014. The investigation is divided into two subsamples, before and after May 2006 for agriculture taking into account the 2006–2008 food crisis and change in U.S. ethanol production policy, and before and after January 2008 for metals considering the recent global financial crisis. We find that, based on impulse response functions, the response of volatility of each commodity to an oil price shock differs significantly depending on the underlying cause of the shock for the both periods. Moreover, according to variance decomposition the explanatory power of oil shocks becomes stronger after the crisis. The different responses of commodities are described in detail by investigating market characteristics in each period.     

Linkages between oil price shocks and stock returns revisited

In this paper, we revisit the debate on the relationship between oil price shocks and stock market returns by replicating the quantile-on-quantile (QQ) regression model for the US stock market in Sim and Zhou (2015, Journal of Banking and Finance), and extending it to 15 countries. The classification of these countries as oil importers or oil exporters depends on their net position in crude oil trade. Our results indicate that the main finding by Sim and Zhou (2015) that large negative oil price shocks can bolster stock returns when markets are performing well is only partially supported by the three largest oil importers in our sample – China, Japan and India – during the period 1988:1–2007:12. However, when extending the study to more recent data (period 1988:1–2016:12), we find that China and India experience higher returns when markets perform well and there is a large positive oil price shock. Also, large positive oil price shocks often lead to higher stock market returns when markets perform well for both oil exporting countries – Canada, Russia, Norway – and moderately oil dependent countries – such as Malaysia, Philippines and Thailand. In most cases large negative oil price shocks depress further already poorly performing markets, as in Sim and Zhou (2015). These findings highlight that the relationship between the distributions of oil price shocks and stock market returns is not stable over time in most countries studied. Furthermore, the asymmetric effect between positive and negative oil price shocks observed in the US market by Sim and Zhou (2015) is less evident in most countries for both the baseline and extended periods.     

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.     

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.     

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 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.     

The effects of oil price shocks on output and inflation in China

Crude oil price shocks derive from many sources, each of which may bring about different effects on macro-economy variables and require completely different designs in macro-economic policy; thus, distinguishing the sources of oil price fluctuations is crucial when evaluating these effects. This paper establishes an open-economy dynamic stochastic general equilibrium (DSGE) model with two economies: China and the rest of the world. To assess the effects of oil price shocks, the CES production function is extended by adding oil as an input. Based on the model, the effects of four types of oil price fluctuations are evaluated. The four types of oil price shocks are 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. Simulation results indicate the following: Oil supply shocks driven by political events mainly produce short-term effects on China's output and inflation, while the other three shocks produce relatively long-term effects; in addition, demand shocks that are specific to the crude oil market contribute the most to the fluctuations in China's output and inflation.     

Oil price shocks and their short- and long-term effects on the Chinese economy

A considerable body of economic literature shows the adverse economic impacts of oil-price shocks for the developed economies. However, there has been a lack of similar empirical study on China and other developing countries. This paper attempts to fill this gap by answering how and to what extent oil-price shocks impact China's economy, emphasizing on the price transmission mechanisms. To that end, we develop a structural vector auto-regressive model. Our results show that an oil-price increase negatively affects output and investment, but positively affects inflation rate and interest rate. However, with price control policies in China, the impact on real economy, represented by real output and real investment, lasts much longer than that to price/monetary variables. Our decomposition results also show that the short-term impact, namely output decrease induced by the cut in capacity–utilization rate, is greater in the first 6 periods (namely half a year), but the portion of the long-term impact, defined as the impact realized through an investment change, increases steadily and exceeds that of short-term impact in the 7th period. Afterwards, the long-term impact dominates, and maintains for quite some time.     

The effects of oil price shocks on the economies of the Gulf Co-operation Council countries: Nonlinear analysis

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.     

Impact of oil price shocks on selected macroeconomic variables in Nigeria

The impact of oil price shocks on the macroeconomy has received a great deal of attention since the 1970 s. Initially, many empirical studies found a significant negative effect between oil price shocks and GDP but more recently, empirical studies have reported an insignificant relationship between oil shocks and the macroeconomy. A key feature of existing research is that it applies predominantly to advanced, oil-importing countries. For oil-exporting countries, different conclusions are expected but this can only be ascertained empirically. This study conducts an empirical analysis of the effects of oil price shocks on a developing country oil-exporter—Nigeria. Our findings showed that oil price shocks do not have a major impact on most macroeconomic variables in Nigeria. The results of the Granger-causality tests, impulse response functions, and variance decomposition analysis all showed that different measures of linear and positive oil shocks have not caused output, government expenditure, inflation, and the real exchange rate. The tests support the existence of asymmetric effects of oil price shocks because we find that negative oil shocks significantly cause output and the real exchange rate.     

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.     

Macroeconomic performance of oil price shocks: Outlier evidence from nineteen major oil-related countries/regions

As a special energy commodity, oil price shocks can affect not only the energy market but also the performance of the macroeconomy. This research provides complementary explanations for nineteen major oil-related countries/regions' macroeconomic effects caused by unexpected oil price changes. It focuses on the macroeconomic performance of oil price shocks from outlier perspective, investigating the inner hidden factors of co-movements between oil price shocks and macroeconomy. Three methods called Empirical Covariance (EC) method, Robust Covariance (RC) method and one-class Support Vector Machine (SVM) method are used in the outlier detection. Empirical results show that: (a) one-class SVM method has the best environmental adaptability for detecting the outlier performance of the co-movements between oil price shocks and macroeconomy, followed by EC and RC methods; (b) according to the time axis, the outlier performances of gross domestic production, consumer price index and unemployment rate are all concentrated in 2005–2014, which is highly consistent with the oil price shock process; and (c) according to the spatial axis (countries), four categories with similar outlier performances are obtained. Outlier performance of macroeconomy of oil-related country/region in lower levels seems to be worse than that of the country/region in higher levels, which can be attributed to more attentions paid by higher-leveled oil-related countries on the oil price shock response system to relieve the severe macroeconomic impacts caused by oil price shocks.     

Oil price shocks and trade imbalances

This study aims to examine whether a large part of the variability of trade balances and their oil and non-oil components is associated with oil price fluctuations. The long-run causality running from oil price to overall, oil and non-oil trade balances and their short-run dynamics are investigated by applying the Toda and Yamamoto, 1995 (TY) causality approach and generalized impulse response functions (IRFs), respectively to the monthly data spanning from January 1999 to November 2011. Three Asian economies that represent three distinct characteristics in terms of oil are chosen and examined: Malaysia as an oil exporter, Singapore as an oil refinery and Japan as an oil importer. The stability of the causality is also checked and the estimated impulse responses across different periods are examined. The results have implications for both policy makers and economic modeling of the impact of oil price shocks.