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Revisiting the relationship between oil price and macro economy: Evidence from India

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  • Rajesh H. Acharya
  • Anver C. Sadath

Abstract

In this paper we revisit the research question of how Indian economy reacted to the changes in the historical oil price. Data on aggregate variables such as real GDP, WPI, interest rate and money supply since 1996 to 2017 are used to estimate Auto-Regressive Distributed Lag (ARDL) model and Structural Vector Auto-Regressive model (SVAR). Empirical results clearly show that oil price is negatively related to real GDP and at the same time, its effect on general inflation is not clear probably due to the massive subsidization of energy resources during the period of study and consequent cushioning of the inflationary effect of oil price shock. Results also show that in the short run, macroeconomic aggregates are mostly influenced by real factors than monetary factors. Result implies that policy makers must create adequate safeguards to ensure that ordinary citizens are not hurt from oil shock as India?s reliance on oil import is expected to increase in the future and also promote efficient use of energy resources.

Suggested Citation

  • Rajesh H. Acharya & Anver C. Sadath, 2018. "Revisiting the relationship between oil price and macro economy: Evidence from India," ECONOMICS AND POLICY OF ENERGY AND THE ENVIRONMENT, FrancoAngeli Editore, vol. 2018(1), pages 173-190.
  • Handle: RePEc:fan:efeefe:v:html10.3280/efe2018-001008
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    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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