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How important are real interest rates for oil prices?

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  • Arora, Vipin
  • Tanner, Matthew

Abstract

Using a recursive vector autoregression (VAR), this paper considers the relation between the U.S. real interest rate and the real oil price. Theoretically, as outlined in Hotelling (1931) and Working (1949), a lower real interest rate results in reduced production and increased storage, implying a higher oil price. The results presented here show that the robustness of this relationship depends crucially on how the real interest rate is calculated, and the time-frame of the sample. Consistent with earlier studies, the oil price falls with an innovation to the ex-ante U.S. real interest rate. However, this is not true if the real interest rate is calculated ex-post. In this case, the oil price only falls in response to an innovation in short-term U.S. real interest rates (three months or less). Additionally, the response of the oil price to longer-term ex-ante U.S. real interest rates must include the period through 2006 for this relationship to appear. The oil price consistently responds to innovations in short-term rates throughout the entire sample. We draw two conclusions from the results. The first is that the oil price is consistently responsive to short-term U.S. real interest rates, underlying the importance of storage. Second, oil prices have become more responsive to longer-term U.S. real interest rates. The reasons behind this change are unclear and require further study.

Suggested Citation

  • Arora, Vipin & Tanner, Matthew, 2011. "How important are real interest rates for oil prices?," MPRA Paper 35883, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:35883
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    References listed on IDEAS

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    Cited by:

    1. Śmiech, Sławomir & Papież, Monika & Dąbrowski, Marek A., 2015. "Does the euro area macroeconomy affect global commodity prices? Evidence from a SVAR approach," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 485-503.
    2. repec:spr:empeco:v:53:y:2017:i:3:d:10.1007_s00181-016-1165-6 is not listed on IDEAS
    3. repec:eee:eneeco:v:66:y:2017:i:c:p:547-558 is not listed on IDEAS
    4. Yin, Libo & Yang, Qingyuan, 2016. "Predicting the oil prices: Do technical indicators help?," Energy Economics, Elsevier, vol. 56(C), pages 338-350.
    5. Benjamin Cheng & Christina Nikitopoulos-Sklibosios & Erik Schlogl, 2016. "Empirical Pricing Performance in Long-Dated Crude Oil Derivatives: Do Models with Stochastic Interest Rates Matter?," Research Paper Series 367, Quantitative Finance Research Centre, University of Technology, Sydney.
    6. repec:eee:ecmode:v:64:y:2017:i:c:p:409-418 is not listed on IDEAS
    7. Wan, Jer-Yuh & Kao, Chung-Wei, 2015. "Interactions between oil and financial markets — Do conditions of financial stress matter?," Energy Economics, Elsevier, vol. 52(PA), pages 160-175.
    8. Papież, Monika & Śmiech, Sławomir, 2015. "Dynamic steam coal market integration: Evidence from rolling cointegration analysis," Energy Economics, Elsevier, vol. 51(C), pages 510-520.
    9. Papież, Monika & Śmiech, Sławomir & Dąbrowski, Marek A., 2014. "The impact of the Euro area macroeconomy on energy and non-energy global commodity prices," MPRA Paper 56663, University Library of Munich, Germany.
    10. Huang, Wanling & Mollick, André Varella & Nguyen, Khoa Huu, 2016. "U.S. stock markets and the role of real interest rates," The Quarterly Review of Economics and Finance, Elsevier, vol. 59(C), pages 231-242.

    More about this item

    Keywords

    Oil price; Real interest rate; VAR; Hotelling; Storage;

    JEL classification:

    • F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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