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The authors would like to thank seminar participants in the Middle East and Central Asia Department’s Discussion Forum for helpful comments and suggestions.
For example, Jiménez-Rodriguez and Sánches (2004) find that a 100 percent increase in oil prices reduces GDP by between 1 and 5 percent in G-7 countries and the Eurozone, with the U.S. at the upper end of that range and no significant impact found for Japan. For Norway they find that the impact is positive at between 1 and 2 percent. Results from several other studies are reported in a survey by Jones et al. (2004).
We identify oil-exporting countries as those where the average share of net oil exports in total exports is at least 20 percent over 1970–2010. Among the other countries, we first identify OECD countries based on the membership in 1980, with Norway dropping out as the only oil exporter. We then divide the remaining countries based on average annual per capita income at purchasing power parity, with a cutoff level of $4000. In the following, we use the terms non-oil exporting and oil-importing interchangeably to ease the exposition, although some of the countries classified as oil-importing also export oil.
To construct the series used in this section we first deflate U.S. dollar values with the U.S. CPI to create indices set to 100 in year 2000. We then apply the HP filter, using λ = 100 and including the April 2011 World Economic Outlook projections to 2015 to enhance the robustness of the 2010 end-point estimates.
To account for possible lagged effects, we also calculated correlations of GDP with oil prices a year earlier instead of contemporaneously. In this specification, the correlations are positive for all oil exporters. The oil-importing countries, in contrast, show no clear pattern, with the group evenly split between those displaying a positive and those displaying a negative correlation. The U.S. still stands out, however, this time with the most negative correlation among all 144 countries.
Available data on foreign direct investment and remittances inflows are not as comprehensive as for imports and exports, but they show a broadly similar pattern of positive correlations.
Given that the presence of a trend in oil prices is debatable, we also calculated correlations without the cyclical adjustment of oil prices. This did not materially change the results.
For real series we distinguish between two concepts. One is where U.S. dollar values are deflated by U.S. CPI, as in the previous section. The other is the conventional measure where nominal series are deflated by their respective deflators. The former is useful to gauge changes in international purchasing power. The latter concept, which we hereafter refer to as volume, measures the quantities involved. In the years with oil price shocks, as shown in Table 2, the former measure consistently increased by more than the latter, implying that the various price deflators all increased by more than U.S. CPI.
Even in 1974 and 1979, when oil prices increased by some 220 and 110 percent—the two largest such increases in our sample period—same-year GDP growth increased relative to the median for all four of our groups. In the year after the shock, however, the negative impact was more pronounced, with growth declining (although still positive for all but the OECD) for all groups of oil importers in both years except middle-income countries in 1980. In 1975, GDP volume growth fell by 3 percentage points for the group of OECD countries and 1.3 percentage points for the other two groups of oil importers. In 1980, the declines were less than 1 percentage point for all groups.
Available data on remittances and foreign direct investment are not as comprehensive as those for imports and exports. While the results are consequently more tentative, applying the methods in this section to these data indicates that the growth rate of oil importing countries’ receipts from remittances and foreign direct investment typically increased during oil shock episodes in much the same way as for exports. On average, however, these flows are smaller than those of exports and the macroeconomic effects are therefore likely to be smaller too.
Given the possibility that the regression results are unduly influenced by countries where output could influence world GDP or oil prices, we tried excluding from the regression the U.S. and Saudi Arabia—the two prime candidates for such causality. This has an almost imperceptibly small impact on the results.