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Oil Shocks and External Balances

  • Lutz Kilian

    (University of Michigan and CEPR)

  • Alessandro Rebucci

    (International Monetary Fund)

  • Nikola Spatafora

    (International Monetary Fund)

This paper studies the effects of demand and supply shocks in the global crude oil market on several measures of countries’ external balance, including the oil trade balance, the non-oil trade balance, the current account and changes in net foreign assets (NFA) during 1975– 2004. We explicitly take a multilateral and global perspective. In addition to the United States, the Euro area and Japan, we consider a number of regional aggregates including oil-exporting economies and middle-income oil-importing economies. Our first result is that the effect of oil shocks on the merchandise trade balance and the current account, which depending on the source of the shock can be large, depends critically on the response of the non-oil trade balance, and differs systematically between the United States and other oil importing countries. Second, using the Lane-Milesi-Ferretti NFA data set, we document the presence of large and systematic (if not always statistically significant) valuation effects in response to oil shocks, not only for the United States, but also for other oil-importing economies and for oil exporters. Our estimates suggest that increased international financial integration will tend to cushion the effect of oil shocks on NFA positions for major oil exporters and for the United States, but may amplify it for other oil importers.

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File URL: http://fordschool.umich.edu/rsie/workingpapers/Papers551-575/r562.pdf
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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 562.

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Length: 43 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:mie:wpaper:562
Contact details of provider: Postal: ANN ARBOR MICHIGAN 48109
Web page: http://fordschool.umich.edu/rsie/

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  1. Jonathan D. Ostry & Carmen M. Reinhart, 1992. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 495-517, September.
  2. Kilian, Lutz, 2008. "Why Does Gasoline Cost so Much? A Joint Model of the Global Crude Oil Market and the U.S. Retail Gasoline Market," CEPR Discussion Papers 6919, C.E.P.R. Discussion Papers.
  3. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2006. "The Valuation Channel of External Adjustment," 2006 Meeting Papers 195, Society for Economic Dynamics.
  4. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "International financial adjustment," Proceedings, Federal Reserve Bank of San Francisco.
  5. Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 283-308, November.
  6. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2005. "A Global Perspective on External Positions," CEPR Discussion Papers 5234, C.E.P.R. Discussion Papers.
  7. Berkowitz, J. & Birgean, I. & Kilian, L., 1999. "On the Finite-Sample Accuracy of Nonparametric Resampling Algorithms for Economic Time Series," Papers 99-01, Michigan - Center for Research on Economic & Social Theory.
  8. Gavin, Michael, 1990. "Structural adjustment to a terms of trade disturbance : The role of relative prices," Journal of International Economics, Elsevier, vol. 28(3-4), pages 217-243, May.
  9. Bruno, Michael & Sachs, Jeffrey, 1982. "Energy and Resource Allocation: A Dynamic Model of the "Dutch Disease"," Review of Economic Studies, Wiley Blackwell, vol. 49(5), pages 845-59, Special I.
  10. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 11-66 National Bureau of Economic Research, Inc.
  11. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
  12. Gavin, Michael, 1991. "Income effects of adjustment to a terms of trade disturbance and the demand for adjustment finance," Journal of Development Economics, Elsevier, vol. 37(1-2), pages 127-153, November.
  13. Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2007. "Oil shocks and external adjustment," International Finance Discussion Papers 897, Board of Governors of the Federal Reserve System (U.S.).
  14. Gonçalves, Sílvia & Kilian, Lutz, 2002. "Bootstrapping autoregressions with conditional heteroskedasticity of unknown form," Working Paper Series 0196, European Central Bank.
  15. Engle, Robert F & Hendry, David F & Richard, Jean-Francois, 1983. "Exogeneity," Econometrica, Econometric Society, vol. 51(2), pages 277-304, March.
  16. Barsky, Robert & Kilian, Lutz, 2004. "Oil and the Macroeconomy Since the 1970s," CEPR Discussion Papers 4496, C.E.P.R. Discussion Papers.
  17. Lutz Kilian, 2008. "Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy?," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 216-240, May.
  18. Michael Bruno & Jeffrey Sachs, 1982. "Energy and Resource Allocation: A Dynamic Model of the "Dutch Disease"," NBER Working Papers 0852, National Bureau of Economic Research, Inc.
  19. Lutz Kilian, 2008. "A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and Inflation in the G7 Countries," Journal of the European Economic Association, MIT Press, vol. 6(1), pages 78-121, 03.
  20. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198 National Bureau of Economic Research, Inc.
  21. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
  22. Backus, David K. & Crucini, Mario J., 2000. "Oil prices and the terms of trade," Journal of International Economics, Elsevier, vol. 50(1), pages 185-213, February.
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