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The differential effects of oil demand and supply shocks on the global economy

Listed author(s):
  • Cashin, Paul
  • Mohaddes, Kamiar
  • Raissi, Maziar
  • Raissi, Mehdi

We employ a set of sign restrictions on the impulse responses of a Global VAR model, estimated for 38 countries/regions over the period 1979Q2–2011Q2, as well as bounds on impact price elasticities of oil supply and oil demand to discriminate between supply-driven and demand-driven oil-price shocks, and to study the time profile of their macroeconomic effects across a wide range of countries and real/financial variables. We show that the above identification scheme can greatly benefit from the cross-sectional dimension of the GVAR—by providing a large number of additional cross-country sign restrictions and hence reducing the set of admissible models. The results indicate that the economic consequences of a supply-driven oil-price shock are very different from those of an oil-demand shock driven by global economic activity, and vary for oil-importing countries compared to energy exporters. While oil importers typically face a long-lived fall in economic activity in response to a supply-driven surge in oil prices, the impact is positive for energy-exporting countries that possess large proven oil/gas reserves. However, in response to an oil-demand disturbance, almost all countries in our sample experience long-run inflationary pressures, an increase in real output, a rise in interest rates, and a fall in equity prices.

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File URL: http://www.sciencedirect.com/science/article/pii/S0140988314000619
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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 44 (2014)
Issue (Month): C ()
Pages: 113-134

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Handle: RePEc:eee:eneeco:v:44:y:2014:i:c:p:113-134
DOI: 10.1016/j.eneco.2014.03.014
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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