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The response of Brent crude oil to the European central bank monetary policy

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  • Soriano, Pilar
  • Torró, Hipòlit

Abstract

This paper examines the impact of European Central Bank (ECB) monetary policy decisions on oil prices and liquidity using an event study with intraday data. We analyse the period from January 1999 to December 2020, which includes the financial crisis that started in August 2007. Our results show a significant response for oil returns only during the financial crisis. Specifically, we find that Brent crude oil futures’ returns responded negatively to unexpected variations in the Italian risk premium as a measure of unconventional monetary policy actions – and positively to unexpected variations in short-term interest rates. That is, an unexpected increase in short-term interest rates and reductions in the Italian risk premium are taken as positive signals anticipating the end of the financial crisis. Moreover, as Brent is priced in US dollars, we have tested if the Brent response is due to the exchange rate response. We find that the null hypothesis of equal response from Brent and the exchange rate to ECB monetary policy announcements cannot be rejected. These are important results for monetary policy makers and financial agents.

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  • Soriano, Pilar & Torró, Hipòlit, 2022. "The response of Brent crude oil to the European central bank monetary policy," Finance Research Letters, Elsevier, vol. 46(PA).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pa:s1544612321003585
    DOI: 10.1016/j.frl.2021.102353
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    Cited by:

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    2. Schneider, Nicolas & Strielkowski, Wadim, 2023. "Modelling the unit root properties of electricity data—A general note on time-domain applications," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 618(C).

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    More about this item

    Keywords

    Monetary policy; Brent crude oil futures; European central bank;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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