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Analysis of real oil prices via trend-cycle decomposition

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  • Özbek, Levent
  • Özlale, Ümit
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    Abstract

    The recent fluctuations in the oil prices have intensified the discussion on the dynamics and causes of real oil price changes. While the long-run component of real oil prices seems to have a stochastic trend, global real economic activity has been thought to generate important changes in real oil prices. Based on this argument, in this paper, we analyze the real oil prices within a trend-cycle decomposition framework, where we impose a stochastic trend and assume the cyclical term to be affected by global economic conditions. We also let the parameters vary over time to see whether shocks to trend and the cycle have changing effects on the real oil prices. As a result, we find that shocks to trend are more persistent recently. In that sense, this paper contributes to the literature by offering an explanation for the increased volatility in oil prices. In addition, we show that global economic activity contributed also to the previous oil price shocks, which were regarded mainly as supply-side driven.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 38 (2010)
    Issue (Month): 7 (July)
    Pages: 3676-3683

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    Handle: RePEc:eee:enepol:v:38:y:2010:i:7:p:3676-3683

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    Web page: http://www.elsevier.com/locate/enpol

    Related research

    Keywords: Oil prices Trend and cycle decomposition Extended Kalman filter;

    References

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    1. Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October.
    2. Robert B. Barsky & Lutz Kilian, 2001. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Working Papers 8389, National Bureau of Economic Research, Inc.
    3. Alan S. Blinder & Jeremy B. Rudd, 2008. "The Supply-Shock Explanation of the Great Stagflation Revisited," NBER Working Papers 14563, National Bureau of Economic Research, Inc.
    4. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July.
    5. Selim Elekdag & René Lalonde & Douglas Laxton & Dirk Muir & Paolo Pesenti, 2007. "Oil Price Movements and the Global Economy: A Model-Based Assessment," Working Papers 07-34, Bank of Canada.
    6. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
    7. Morana, Claudio, 2001. "A semiparametric approach to short-term oil price forecasting," Energy Economics, Elsevier, vol. 23(3), pages 325-338, May.
    8. J. Bradford DeLong, 1997. "America’s Peacetime Inflation: The 1970s," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 247-280 National Bureau of Economic Research, Inc.
    9. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers 5994, C.E.P.R. Discussion Papers.
    10. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 797-814, November.
    11. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-68, July.
    12. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 216-27, June.
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    Cited by:
    1. Jakobsson, Kristofer & Söderbergh, Bengt & Snowden, Simon & Li, Chuan-Zhong & Aleklett, Kjell, 2012. "Oil exploration and perceptions of scarcity: The fallacy of early success," Energy Economics, Elsevier, vol. 34(4), pages 1226-1233.

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