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Oil Shocks and External Balances

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  • International Monetary Fund

Abstract

This paper studies the effects of demand and supply shocks in the global crude oil market on several measures of countries'' external balance, including the oil and non-oil trade balances, the current account, and changes in net foreign assets (NFA) during 1975-2004. We explicitly take a global perspective. In addition to the U.S., the Euro area and Japan, we consider a number of country groups including oil exporters and middle-income oil-importing economies. We find that the effect of oil shocks on the merchandise trade balance and the current account, which depending on the source of the shock can be large, depends critically on the response of the nonoil trade balance, and differs systematically between the U.S. and other oil importing countries. Using the Lane-Milesi-Ferretti NFA data set, we document the presence of large and systematic (if not always statistically significant) valuation effects in response to oil shocks, not only for the U.S., but also for other oil-importing economies and for oil exporters. Our estimates suggest that increased international financial integration will tend to cushion the effect of oil shocks on NFA positions for major oil exporters and the U.S., but may amplify it for other oil importers.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/110.

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Length: 39
Date of creation: 01 May 2007
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Handle: RePEc:imf:imfwpa:07/110

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Keywords: Oil prices; External shocks; Trade integration; oil exporters; crude oil; oil shocks; oil supply; aggregate demand; oil market; oil-importing economies; crude oil market; oil importers; oil-importing countries; importing countries; trade deficit; oil demand; opec; oil exporter; oil price changes; merchandise trade; oil shock; dynamic effects; current account balance; regression model; oil importing countries; current account deficit; oil production; terms of trade; trade deficits; oil exports; opec countries; oil supplies; crude oil production; trade in services; oil revenues; exporting countries; trade shocks; oil exporting countries; price fluctuations; adjustment process; world economy; oil price fluctuations; fuel exports; higher oil prices; terms of trade shocks; oil importer; pattern of shocks; oil markets; oil inventory; global supply; income distribution; international trade; natural gas; external position; current account surplus; trade effects; crude oil inventory; oil producers; economic studies; trade imbalances; balance of payments; export share; crude oil markets; petroleum products; trade data; tradable goods; economic perspectives; crude oil exports;

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References

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  1. Reinhart, Carmen & Ostry, Jonathan, 1992. "Saving and Terms of Trade Shocks: Evidence from Developing Countries," MPRA Paper 6976, University Library of Munich, Germany.
  2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2005. "A Global Perspective on External Positions," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5234, C.E.P.R. Discussion Papers.
  3. GONÇALVES, Silvia & KILIAN, Lutz, 2003. "Bootstrapping Autoregressions with Conditional Heteroskedasticity of Unknown Form," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2003-01, Universite de Montreal, Departement de sciences economiques.
  4. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 115(4), pages 665-703, 08.
  5. Kilian, Lutz, 2008. "Why Does Gasoline Cost so Much? A Joint Model of the Global Crude Oil Market and the U.S. Retail Gasoline Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6919, C.E.P.R. Discussion Papers.
  6. Kilian, Lutz, 2007. "The Economic Effects of Energy Price Shocks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6559, C.E.P.R. Discussion Papers.
  7. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege," NBER Chapters, National Bureau of Economic Research, Inc, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 11-66 National Bureau of Economic Research, Inc.
  8. Jaewoo Lee & Fabio Ghironi & Alessandro Rebucci, 2009. "The Valuation Channel of External Adjustment," IMF Working Papers 09/275, International Monetary Fund.
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  10. Kilian, Lutz, 2005. "Exogenous Oil Supply Shocks: How Big Are They and How Much do they Matter for the US Economy?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5131, C.E.P.R. Discussion Papers.
  11. Jonathan David Ostry & Carmen Reinhart, 1991. "Private Saving and Terms of Trade Shocks," IMF Working Papers 91/100, International Monetary Fund.
  12. Bodenstein, Martin & Erceg, Christopher J. & Guerrieri, Luca, 2011. "Oil shocks and external adjustment," Journal of International Economics, Elsevier, Elsevier, vol. 83(2), pages 168-184, March.
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  15. Engle, Robert F & Hendry, David F & Richard, Jean-Francois, 1983. "Exogeneity," Econometrica, Econometric Society, Econometric Society, vol. 51(2), pages 277-304, March.
  16. Jonathan D. Ostry & Carmen M. Reinhart, 1992. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 495-517, September.
  17. Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 283-308, November.
  18. Berkowitz, J. & Birgean, I. & Kilian, L., 1999. "On the Finite-Sample Accuracy of Nonparametric Resampling Algorithms for Economic Time Series," Papers, Michigan - Center for Research on Economic & Social Theory 99-01, Michigan - Center for Research on Economic & Social Theory.
  19. Lutz Kilian, 2008. "A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and Inflation in the G7 Countries," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(1), pages 78-121, 03.
  20. 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.
  21. Gavin, Michael, 1991. "Income effects of adjustment to a terms of trade disturbance and the demand for adjustment finance," Journal of Development Economics, Elsevier, Elsevier, vol. 37(1-2), pages 127-153, November.
  22. Bruno, Michael & Sachs, Jeffrey, 1982. "Energy and Resource Allocation: A Dynamic Model of the "Dutch Disease"," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(5), pages 845-59, Special I.
  23. Robert Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," NBER Working Papers 10855, National Bureau of Economic Research, Inc.
  24. Gavin, Michael, 1990. "Structural adjustment to a terms of trade disturbance : The role of relative prices," Journal of International Economics, Elsevier, Elsevier, vol. 28(3-4), pages 217-243, May.
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