This paper documents the determinants of real oil price in the global market based on
SVAR model embedding transitory and permanent shocks on oil demand and supply as
well as speculative disturbances. We find evidence of significant differences in the
propagation mechanisms of transitory versus permanent shocks, pointing to the
importance of disentangling their distinct effects. Permanent supply disruptions turn out to
be a bigger factor in historical oil price movements during the most recent decades, while
speculative shocks became less influential.
The effect that the recent decline in the price of oil has had on growth is far from clear, with
many observers at odds to explain why it does not seem to have provided a significant boost
to the world economy. This paper aims to address this puzzle by providing a systematic
analysis of the effect of oil price shocks on growth for 72 countries comprising 92.8% of world
GDP. We find that, on net, shocks driving the oil price in 2015 shaved off 0.2 percentage points
of growth for the median country in our sample, and 0.17 percentage points in GDP-weighted
terms. While increases in oil supply and shocks to oil-specific demand actually boosted growth
in 2015 (by about 0.2 and 0.4 percentage points, respectively), weak global demand more than
offset these gains, reducing growth by 0.8 percentage points. Counterfactual simulations for
the 72 countries in our sample underscore the importance of diversification, rather than low
levels of openness, in shielding against negative shocks to the world economy.
Julia Faltermeier, Mr. Ruy Lama, and Juan Pablo Medina
We study the optimal foreign exchange (FX) intervention policy in response to a positive terms of trade shock
and associated Dutch disease episode in a small open economy model. We find that during a Dutch disease
episode tradable production drops below the socially optimal level, resulting in lower welfare under learningby-
doing (LBD) externalities. FX reserves accumulation improves welfare by preventing a large appreciation of
the real exchange rate and by inducing an efficient reallocation between the tradable and non-tradable sectors.
For an empirically plausible parametrization of LBD externalities, the model predicts that in response to a 10
percent increase in commodity prices FX reserves should increase by 1.5 percent of GDP. We also find that the
welfare gains from optimally using FX reserves are twice as high as the gains from relying only on monetary
policy. These results suggest that FX intervention is a beneficial policy to counteract the loss of competitiveness
during a Dutch disease episode.
The December 2015 IMF Research Bulletin features a sampling of key research from the IMF. The Research Summaries in this issue look at “The Impact of Deflation and Lowflation on Fiscal Aggregates (Nicolas End, Sampawende J.-A. Tapsoba, Gilbert Terrier, and Renaud Duplay); and “Oil Exporters at the Crossroads: It Is High Time to Diversify” (Reda Cherif and Fuad Hasanov). Mahvash Saeed Qureshi provides an overview of the fifth Lindau Meeting in Economics in “Meeting the Nobel Giants.” In the Q&A column on “Seven Questions on Financial Frictions and the Sources of the Business Cycle, Marzie Taheri Sanjani looks at the driving forces of the business cycle and macroeconomic models. The top-viewed articles in 2014 from the IMF Economic Review are highlighted, along with recent IMF Working Papers, Staff Discussion Notes, and IMF publications.
This paper, using a six-region DSGE model of the world economy, assesses the GDP and current account implications of permanent oil supply shocks hitting the world economy at an unspecified future date. For modest-sized shocks and conventional production technologies the effects are modest. But for larger shocks, for elasticities of substitution that decline as oil usage is reduced to a minimum, and for production functions in which oil acts as a critical enabler of technologies, GDP growth could drop significantly. Also, oil prices could become so high that smooth adjustment, as assumed in the model, may become very difficult.
This paper studies the effects of demand and supply shocks in the global crude oil market on several measures of countries' external balance, including the oil and non-oil trade balances, the current account, and changes in net foreign assets (NFA) during 1975-2004. We explicitly take a global perspective. In addition to the U.S., the Euro area and Japan, we consider a number of country groups including oil exporters and middle-income oil-importing economies. We find that the effect of oil shocks on the merchandise trade balance and the current account, which depending on the source of the shock can be large, depends critically on the response of the nonoil trade balance, and differs systematically between the U.S. and other oil importing countries. Using the Lane-Milesi-Ferretti NFA data set, we document the presence of large and systematic (if not always statistically significant) valuation effects in response to oil shocks, not only for the U.S., but also for other oil-importing economies and for oil exporters. Our estimates suggest that increased international financial integration will tend to cushion the effect of oil shocks on NFA positions for major oil exporters and the U.S., but may amplify it for other oil importers.