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Structural oil price shocks and policy uncertainty

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  • Kang, Wensheng
  • Ratti, Ronald A.

Abstract

Increases in the real price of oil not explained by changes in global oil production or by global real demand for commodities are associated with significant increases in economic policy uncertainty. Oil-market specific demand shocks account for 30% of conditional variation in economic policy uncertainty and 21.5% of conditional variation in CPI forecast interquartile range after 24 months. Positive shocks due to global real aggregate demand for commodities significantly reduce economic policy uncertainty. Structural oil price shocks appear to have long-term consequences for economic policy uncertainty, and to the extent that the latter has impact on real activity the policy connection provides an additional channel by which oil price shocks have influence on the economy. As a robustness check, structural oil price shocks are significantly associated with economic policy uncertainty in Europe and energy-exporting Canada.

Suggested Citation

  • Kang, Wensheng & Ratti, Ronald A., 2013. "Structural oil price shocks and policy uncertainty," MPRA Paper 49007, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:49007
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    References listed on IDEAS

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    More about this item

    Keywords

    Oil prices; policy uncertainty; structural VAR;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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