Abstract
After reaching a 25-year low in February 1999, oil prices have sharply been rising over the next more than a half decade. Recently, the international price of oil has breached the US$150 mark. Given the macroeconomic developments that followed the oil shocks of the 1970s, the substantial rise in oil prices since 1999 has generated concerns about the prospects for growth and inflation and raised related questions about the appropriate way for monetary and energy policies to respond.
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Notes
- 1.
To our knowledge there is only one published study, Cunado and Gracia (2005) which studies the impact on Asian countries namely Japan, Singapore, South Korea, Malaysia, Thailand, and Philippines.
- 2.
For literature surveys, see Jones and Leiby (1996), Brown and Yucel (2002), Jones et al. (2004) etc.
- 3.
In measuring the value of oil price excluding taxes we follow the existing literature since there is no database for tax-including end-use prices of oil products over the sample period.
- 4.
Although all these variables are also constructed in US$, we do not plot them but are available by request from the author.
- 5.
The aggregate economic activity is proxied by IIP since the quarterly GDP series in India is available since 1996–1997 only.
- 6.
REER is defined such that a decrease means a real depreciation of the INR. A depreciation of the REER is expected to increase India's external competitiveness.
- 7.
Inflation is defined as the change in consumer price index (CPI), i.e. ΔCPI = CPI t − CPI t  −  1 .
- 8.
Money market interest rate is considered as the short-term interest rate.
- 9.
Industrial growth is defined as the change in logarithmic value of IIP, i.e., Industrial Growth = ln(IIP t ) − ln(IIP t  − 1).
- 10.
As a robustness check, other possible ordering are also considered, including the case of an alternative ordering that only differs from the baseline model in that one allows for the contemporaneous influence of real oil price innovation on industrial growth. It was verified that the impulse responses do not change considerably with the baseline specification.
- 11.
Quarterly changes in real oil prices are used in the linear approach to VAR estimation, and are transformed, as discussed in Sect. 13.3, for their use in non-linear models.
- 12.
Although the analysis of impulse response functions and variance decomposition is also conducted by using the oil price variable in US$, we do not present them as the results are not qualitatively different from using oil price variable in Indian rupees but are available by request from the author.
- 13.
The null hypothesis that the sum of positive and negative real oil price variable coefficients is equal in VAR framework has been tested, obtaining the rejection of null hypothesis in all cases.
- 14.
According to Huntington (1998) the crude oil price shocks are essentially energy price shocks that are transmitted to the economy through changes in refined petroleum products. In India, the prices of petroleum products are administered (although theoretical dismantled in 2002 but not in practice) and do not change according to changes in the prices of crude oil.
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Appendix
Appendix
The quarterly data used in this study are mainly obtained from two sources: International Financial Statistics (IFS) CDROM and the Reserve Bank of India (RBI) Database of Indian Economy. The variable and source details are these:
Economic activity: The aggregate economic activity is proxied by Index of Industrial Production (IIP), since for India, the quarterly GDP series is available since 1996–1997 only. The series for IIP covers the period 1975Q1 to 2004 and is taken from IFS-CDROM.
Oil price variable: The world oil price measured in US$ for India is calculated as the average of UK Brent and Saudi Prices since India's oil imports are mainly based on the prices of these two markets. To convert these oil prices into real world prices we deflated the nominal prices by the world consumer price indices. Real oil prices measured in Indian rupees (INR) are calculated by converting world oil prices by the market rate of exchange and then deflating by the wholesale price indices (WPI) found in India. The series for oil price covers the period 1970Q1 to 2004Q4 and is taken from IFS-CDROM.
Inflation rate: Calculated from consumer Price Index (CPI) and taken from the IFS-CDROM for the period 1975Q1 to 2004Q3.
Short-term interest rate: Measured by the money market rate of interest (MMR) and obtained from RBI for the period 1975Q1 to 2004Q3. RBI provided the monthly estimated money market rate of interest. To convert the series into quarterly data we have taken the simple 3-month average.
Real effective exchange rate (REER): REER series is taken from the RBI for the period 1975Q1 to 2004Q3. RBI provided monthly estimates of the money market rate of interest. To convert the series into quarterly data we have taken the simple 3-month average. RBI constructs the 5-country trade-based nominal effective exchange rate (NEER) and REER on a daily basis. The countries chosen are the United States, Germany, Japan, United Kingdom, and France (G-5 countries). REER is defined as the weighted average of NEER adjusted by the ratio of the domestic inflation rate to foreign inflation rates. In terms of formula, \({\text{REER}} = \prod\limits_{i = 1}^5 {\left[ {\left( {\frac{e}{{e_i }}} \right)\left( {\frac{P}{{P_i }}} \right)} \right]} ^{w_i }\) where: e is the exchange rate of rupee against numeraire (SDRs) (i.e., SDRs per Rupee) (in index form), e i : Exchange rate of currency i against the numeraire(SDRs) (i.e., SDRs per currency i) (in index form) (i = US Dollar, Japanese Yen, Deutsche Mark, Pound Sterling, French Franc), w i: Weights attached to currency/country i in the index, P: India's wholesale price index (WPI) (in Index form), and P i : Consumer Price Index (CPI) of country i (in Index form). The increase in the value of REER implies the appreciation of the currency and decline in the competitiveness of the country.
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Kumar, S., Managi, S. (2009). Macroeconomic Effects of Oil Price Shocks. In: The Economics of Sustainable Development. Natural Resource Management and Policy, vol 32. Springer, New York, NY. https://doi.org/10.1007/978-0-387-98176-5_13
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DOI: https://doi.org/10.1007/978-0-387-98176-5_13
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