Abstract
This research evaluates the impact of oil price shocks on oil producing and consuming economies; we used a simultaneous equation framework for different economies with business relations. As expected, we found that oil producers (in this study, Iran and the Russian Federation) benefit from oil price shocks. However contrary to previous findings, they also benefit from the indirect effect through their trade partners. For oil-consuming economies, the effects are more diverse. In some economies, output falls in response to an oil price shock, while some others seem to be immune. Generally, those economies that trade more with oil producers gain indirect benefits via higher demand from oil producers. For instance, the Netherlands, Germany, France, Italy, the United States, the United Kingdom, and the People’s Republic of China get negative direct effects and positive indirect effects from oil producing economies. This is exactly the result that we anticipated. India has both negative effects directly and indirectly and seems to suffer more in a positive oil price shock. For Japan, Spain, Switzerland, and Turkey the results are reversed. They benefit from an oil shock directly and indirectly.
An earlier version of this chapter first appeared as F. Taghizadeh-Hesary, N. Yoshino, G. Abdoli, and A. Farzinvash. 2013. An estimation of the impact of oil shocks on crude oil exporting economies and their trade partners. Frontiers of Economics in China 8(4): 571–591. Reused with permission from Higher Education Press and Brill.
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Notes
- 1.
Saudi Arabia is the largest oil exporter but some statistics for this country were not available; this is why we selected Iran and the Russian Federation.
- 2.
Macroeconomic variables were GDP growth rate, government spending, and money supply.
- 3.
This study covers the same set of economies modeled in Abeysinghe (1998), namely ASEAN4 (Indonesia, Malaysia, Philippines, Thailand), NIE4 (Hong Kong, China; Republic of Korea; Singapore; Taipei,China), the PRC, Japan, US, and the rest of OECD as a group (ROECD).
- 4.
Scarcity rent .
- 5.
The third shock differs from the other shocks because it was short and ended soon after it begun.
- 6.
Or as in Taghizadeh-Hesary and Yoshino (2013), which broke down the energy sources to crude oil, natural gas, and coal, in order to obtain world crude oil demand and supply equations. They found that during 1960–2011, world oil demand was elastic to coal prices; however there was no significant association between crude oil demand and natural gas prices .
- 7.
- 8.
Hadamard product.
- 9.
Section 7.4.2. of this chapter explains why we have 19 economies in our survey.
- 10.
The estimation of the simultaneous equations system (9) can be done by (1) two-stage least square (2SLS ) (2) three-stage least square (3SLS ) or (3) weighted two-stage least square (W2SLS). 2SLS, 3SLS and W2SLS are instrumental-variable estimation methodologies; Abeysinghe (2001) suggests using 4 lags of each y it ( i = 1,…,19) and 4 lags of oil shocks of economy i as instruments. We used the Akaike information criterion (AIC ) to select the lag orders in which the maximum lag is set to 4 lags of each y it ( i = 1,…,19) and 4 lags of oil shocks of economy i as instruments, and in order to get a more rational result, we used the system method of estimation; weighted two-stage least square (W2SLS).
- 11.
Weighted two-stage least squares.
- 12.
US GDP deflator (2005 = 100).
- 13.
Weighted GDP growth rates series of trade partners (summation of multiplied GDP growth rate of each trade partner by the export share, Wij).
- 14.
As the results show, the indirect effect of a positive oil shock for an oil exporter could be positive, if after an oil shock a majority of its trading partners do not face output decline. Oil importers can avoid output decline by taking compensatory measures like lowering interest rates through monetary easing, or by accepting lower wages. If these things can happen, although the price of energy has risen, other production input prices have decreased to compensate. Therefore, oil importers do not need to raise the price of their exported goods and can keep their competitiveness in the world market. In this case the oil importers could continue purchasing a similar quantity of oil, or perhaps even more. This explains our findings for the positive indirect effect for Iran and the Russian Federation. In summary, the indirect effect of an oil shock is not necessarily negative for oil exporters.
- 15.
The Asian Development Bank refers to China by the name People’s Republic of China and to Russia by the name Russian Federation.
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The Asian Development Bank refers to China by the name People’s Republic of China and to Russia by the name Russian Federation.
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Taghizadeh-Hesary, F., Yoshino, N., Abdoli, G., Farzinvash, A. (2016). Macroeconomic Impacts of Oil Price Fluctuations in a Trade Linked Case. In: Yoshino, N., Taghizadeh-Hesary, F. (eds) Monetary Policy and the Oil Market. ADB Institute Series on Development Economics. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55797-5_7
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