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News Shocks in Open Economies; Evidence from Giant Oil Discoveries

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  • Rabah Arezki
  • Valerie A Ramey
  • Liugang Sheng

Abstract

This paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output ? the delay between a discovery and production is on average 4 to 6 years. We first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery. We then estimate the effects of giant oil discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time.

Suggested Citation

  • Rabah Arezki & Valerie A Ramey & Liugang Sheng, 2015. "News Shocks in Open Economies; Evidence from Giant Oil Discoveries," IMF Working Papers 15/209, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:15/209
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    More about this item

    Keywords

    Oil sector; External shocks; Oil production; Current account; Open economies; Oil; news shocks; current account and business cycles; production; investment; gdp; economy; capital; General; Open Economy Macroeconomics;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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