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How important are real interest rates for oil prices?

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  • Arora, Vipin
  • Tanner, Matthew

Abstract

Using a recursive vector autoregression (VAR), this paper considers the relation between the U.S. real interest rate and the real oil price. Theoretically, as outlined in Hotelling (1931) and Working (1949), a lower real interest rate results in reduced production and increased storage, implying a higher oil price. The results presented here show that the robustness of this relationship depends crucially on how the real interest rate is calculated, and the time-frame of the sample. Consistent with earlier studies, the oil price falls with an innovation to the ex-ante U.S. real interest rate. However, this is not true if the real interest rate is calculated ex-post. In this case, the oil price only falls in response to an innovation in short-term U.S. real interest rates (three months or less). Additionally, the response of the oil price to longer-term ex-ante U.S. real interest rates must include the period through 2006 for this relationship to appear. The oil price consistently responds to innovations in short-term rates throughout the entire sample. We draw two conclusions from the results. The first is that the oil price is consistently responsive to short-term U.S. real interest rates, underlying the importance of storage. Second, oil prices have become more responsive to longer-term U.S. real interest rates. The reasons behind this change are unclear and require further study.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35883.

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Date of creation: 23 Dec 2011
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Handle: RePEc:pra:mprapa:35883

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Keywords: Oil price; Real interest rate; VAR; Hotelling; Storage;

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References

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  1. Vipin Arora, 2011. "Asset Value, Interest Rates and Oil Price Volatility," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 87(s1), pages 45-55, 09.
  2. Q. Farooq Akram, 2008. "Commodity prices, interest rates and the dollar," Working Paper, Norges Bank 2008/12, Norges Bank.
  3. Shu-ping Shi & Vipin Arora, 2011. "An Application Of Models Of Speculative Behaviour To Oil Prices," CAMA Working Papers 2011-11, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Ansgar Belke & Ingo Bordon & Torben Hendricks, 2010. "Global liquidity and commodity prices-a cointegrated VAR approach for OECD countries," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 20(3), pages 227-242.
  5. Vipin Arora & Rod Tyers, 2011. "Asset Arbitrage and the Price of Oil," CAMA Working Papers 2011-21, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  6. Bernanke, Ben S & Gertler, Mark & Watson, Mark W, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: Reply," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(2), pages 287-91, April.
  7. Alquist, Ron & Kilian, Lutz & Vigfusson, Robert J., 2011. "Forecasting the Price of Oil," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8388, C.E.P.R. Discussion Papers.
  8. Margaret E. Slade & Henry Thille, 2009. "Whither Hotelling: Tests of the Theory of Exhaustible Resources," Annual Review of Resource Economics, Annual Reviews, Annual Reviews, vol. 1(1), pages 239-259, 09.
  9. Alessio Anzuini & Marco J. Lombardi & Patrizio Pagano, 2012. "The impact of monetary policy shocks on commodity prices," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 851, Bank of Italy, Economic Research and International Relations Area.
  10. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
  11. Christopher Reicher & Johannes Utlaut, 2010. "The relationship between oil prices and long-term interest rates," Kiel Working Papers 1637, Kiel Institute for the World Economy.
  12. Hamilton, James D & Herrera, Ana Maria, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(2), pages 265-86, April.
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Cited by:
  1. Papież, Monika & Śmiech, Sławomir & Dąbrowski, Marek A., 2014. "The impact of the Euro area macroeconomy on energy and non-energy global commodity prices," MPRA Paper 56663, University Library of Munich, Germany.

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