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Oil Price Shocks, Real Economic Activity and Uncertainty

Author

Listed:
  • Amélie Charles

    (Audencia Business School)

  • Chew Lian Chua

    (University of Nottingham Ningbo [China])

  • Olivier Darné

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes)

  • Sandy Suardi

    (University of Wollongong [Australia])

Abstract

This paper develops a structural factor vector autoregressive (SFVAR) model to study the effect of oil price shock on economic activity. The model allows both types of uncertainty (real economic activity and oil price) to directly affect oil prices and economic activity. More importantly, the factor variable, which is akin to the macroeconomic uncertainty measure of Henzel and Rengel (2017), captures the significant indirect spillover effects of both supplyrelated (oil prices) and demand-related (business cycle) shocks on oil prices and economic activity. By incorporating the indirect effect of this macroeconomic uncertainty, the response of economic activity to oil price shocks is amplified. In some countries the real effect is prolonged. Results for net oil exporting (importing) countries show that an oil price hike has an appreciably positive (negative) effect on economic activity. The factor dynamics of all countries, except for France, are highly correlated with each other, while they are all moderately correlated with some commonly used measures of macroeconomic uncertainty.

Suggested Citation

  • Amélie Charles & Chew Lian Chua & Olivier Darné & Sandy Suardi, 2021. "Oil Price Shocks, Real Economic Activity and Uncertainty," Post-Print hal-03284089, HAL.
    • Handle: RePEc:hal:journl:hal-03284089
    DOI: 10.1111/boer.12252
    Note: View the original document on HAL open archive server: https://audencia.hal.science/hal-03284089
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    Keywords

    Oil price uncertainty; Real Uncertainty; Impulse response; Outliers; Factor model;
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