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Oil prices and the world business cycle: A causal investigation

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Abstract

Oil shocks have been often considered as exogenous factors responsible of economic downturns. In this paper the hypothesized exogeneity of oil prices is investigated by using running cross-correlations, distributed lag-regressions, Granger causality tests and VAR models applied to annual data 1960-2014 of oil prices and global economic activity—as measured by world GDP. Strong evidence is found that (a) the relation between oil prices and the global economy has significantly changed since the 1960s to the present, and (b) oil prices are endogenously influenced by the level of activity in the global economy. Evidence of a negative effect of oil prices on the global economy is weak for the whole sample and null for recent decades. These findings are consistent with former results using the Kilian index, which is shown to be a leading indicator of activity in the world economy. As such it is significantly correlated with other indicators of the global business cycle, such as the rate of growth of world output and the annual growth of CO2 global emissions.

Suggested Citation

  • Tapia, Jose, 2016. "Oil prices and the world business cycle: A causal investigation," MPRA Paper 68978, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:68978
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    References listed on IDEAS

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    1. Robert B. Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 115-134, Fall.
    2. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
    3. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    4. Maravall, A. & del Rio, A., 2007. "Temporal aggregation, systematic sampling, and the Hodrick-Prescott filter," Computational Statistics & Data Analysis, Elsevier, vol. 52(2), pages 975-998, October.
    5. James D. Hamilton, 2011. "Historical Oil Shocks," NBER Working Papers 16790, National Bureau of Economic Research, Inc.
    6. Robert Mabro, 1992. "OPEC and the Price of Oil," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
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    More about this item

    Keywords

    oil price; global economy; business cycle;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F00 - International Economics - - General - - - General
    • F2 - International Economics - - International Factor Movements and International Business

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