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The Differential Effects of Oil Demand and Supply Shocks on the Global Economy

Author

Listed:
  • Paul Cashin
  • Kamiar Mohaddes
  • Maziar Raissi
  • Mehdi Raissi

    (International Monetary Fund)

Abstract
We employ a set of sign restrictions on the impulse responses of a Global VAR model, estimated for 38 countries/regions over the period 1979Q2–2011Q2, as well as bounds on impact price elasticities of oil supply and oil demand to discriminate between supply-driven and demand-driven oil-price shocks, and to study the time profile of their macroeconomic effects across a wide range of countries and real/financial variables. We show that the above identification scheme can greatly benefit from the cross-sectional dimension of the GVAR—by providing a large number of additional cross-country sign restrictions and hence reducing the set of admissible models. The results indicate that the economic consequences of a supply-driven oil-price shock are very different from those of an oil-demand shock driven by global economic activity, and vary for oil-importing countries compared to energy exporters. While oil importers typically face a long-lived fall in economic activity in response to a supply-driven surge in oil prices, the impact is positive for energy-exporting countries that possess large proven oil/gas reserves. However, in response to an oil-demand disturbance, almost all countries in our sample experience long-run inflationary pressures, an increase in real output, a rise in interest rates, and a fall in equity prices.

Suggested Citation

  • Paul Cashin & Kamiar Mohaddes & Maziar Raissi & Mehdi Raissi, 2013. "The Differential Effects of Oil Demand and Supply Shocks on the Global Economy," Working Papers 757, Economic Research Forum, revised Jun 2013.
    • Handle: RePEc:erg:wpaper:757
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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