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OPEC´s Oil Exporting Strategy and Macroeconomic (In)Stability

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Aguiar-Conraria and Wen (2008) argued that dependence on foreign oil raises the likelihood of equilibrium indeterminacy (economic instability) for oil importing countries. We argue that this relation is more subtle. The endogenous choices of prices and quantities by a cartel of oil exporters, such as the OPEC, can affect the directions of the changes in the likelihood of equilibrium indeterminacy. We show that fluctuations driven by self-fulfilling expectations under oil shocks are easier to occur if the cartel sets the price of oil, but the result is reversed if the cartel sets the quantity of production. These results offer a potentially interesting explanation for the decline in economic volatility (i.e., the Great Moderation) in oil importing countries since the mid-1980s when the OPEC cartel changed its market strategies from setting prices to setting quantities, despite the fact that oil prices are far more volatile today than they were 30 years ago.

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  • Luís Francisco Aguiar & Yi Wen, 2011. "OPEC´s Oil Exporting Strategy and Macroeconomic (In)Stability," NIPE Working Papers 10/2011, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:10/2011
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    Cited by:

    1. Yen-Hsien Lee & Ting-Huei Liao & Ya-Ling Huang & Tzu-Ling Huang, 2015. "Dynamic Spillovers between Oil and Stock Markets: New Approaches at Spillover Index," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(2), pages 178-189, April.
    2. Funashima, Yoshito, 2017. "Time-varying leads and lags across frequencies using a continuous wavelet transform approach," Economic Modelling, Elsevier, vol. 60(C), pages 24-28.
    3. Medel, Carlos A., 2015. "Geopolitical Tensions, OPEC News, and Oil Price: A Granger Causality Analysis," MPRA Paper 65667, University Library of Munich, Germany.
    4. Mensi, Walid & Hammoudeh, Shawkat & Yoon, Seong-Min, 2014. "How do OPEC news and structural breaks impact returns and volatility in crude oil markets? Further evidence from a long memory process," Energy Economics, Elsevier, vol. 42(C), pages 343-354.
    5. Luís Francisco Aguiar-Conraria & Teresa Maria Rodrigues & Maria Joana Soares, 2013. "Oil Shocks and the Euro as an Optimum Currency Area," NIPE Working Papers 01/2013, NIPE - Universidade do Minho.
    6. Serdar Öztürk & Ali Sözdemir & Özlem Ülger, 2013. "The Real Crisis Waiting for the World: Oil Problem and Energy Security," International Journal of Energy Economics and Policy, Econjournals, vol. 3(Special), pages 74-79.
    7. Snudden, Stephen, 2016. "Cyclical fiscal rules for oil-exporting countries," Economic Modelling, Elsevier, vol. 59(C), pages 473-483.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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