Abdel Ghafar, A. (2016). Will the GCC be able to Adjust to Lower Oil Prices? Adel Abdel Ghafar’s Blog on Brookings posted on February 18, 2016.
Baffes, J., M. A. Kose, F. Ohnsorge, and M. Stocker (2015). The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses. World Bank Policy Research Note PRS/15/01.
Bernanke, B. (2016). The Relationship Between Stocks and Oil Prices. Ben Bernanke’s Blog on Brookings posted on February 19, 2016.
Cashin, P., K. Mohaddes, and M. Raissi (2015). Fair Weather or Foul? The Macroeconomic Effects of El Niño. IMF Working Paper WP/15/89.
Cashin, P., K. Mohaddes, and M. Raissi (2016). China’s Slowdown and Global Financial Market Volatility: Is World Growth Losing Out? IMF Working Paper WP/16/63.
Cashin, P., K. Mohaddes, M. Raissi, and M. Raissi (2014). The Differential Effects of Oil Demand and Supply Shocks on the Global Economy. Energy Economics 44, 113–134.
Crémer, J. and D. Salehi-Isfahani (1980). A Theory of Competitive Pricing in the Oil Market: What Does OPEC Really Do? CARESS Working Paper 80-4, University of Pennsylvania, Philadelphia.
Dees, S., F. di Mauro, M. H. Pesaran, and L. V. Smith (2007). Exploring the International Linkages of the Euro Area: A Global VAR Analysis. Journal of Applied Econometrics 22, 1–38.
Devarajan, S. (2016). How the Arab World Can Benefit from Low Oil Prices. Presentation at the “Oil, Middle East, and the Global Economy Conference” at the University of Southern California on April 2, 2016.
Hamilton, J. D. (2009). Causes and Consequences of the Oil Shock of 2007-08. Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution 40(1), 215–283.
Kilian, L. (2009). Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market. The American Economic Review 99(3), 1053–1069.
Mohaddes, K. and M. H. Pesaran (2014). One Hundred Years of Oil Income and the Iranian Economy: A Curse or a Blessing? In P. Alizadeh and H. Hakimian (Eds.), Iran and the Global Economy: Petro Populism, Islam and Economic Sanctions. Routledge, London.
Mohaddes, K. and M. H. Pesaran (2016). Country-Specific Oil Supply Shocks and the Global Economy: A Counterfactual Analysis. Energy Economics 59, 382–399.
Obstfeld, M., G. M. Milesi-Ferretti, and R. Arezki (2016). Oil Prices and the Global Economy: It’s Complicated. iMFdirect blog posted on March 24, 2016.
Pesaran, M. H., T. Schuermann, and S. Weiner (2004). Modelling Regional Interdependencies using a Global Error-Correcting Macroeconometric Model. Journal of Business and Economics Statistics 22, 129–162.
Pesaran, M. H., Y. Shin, and R. P. Smith (1999). Pooled Mean Group Estimation of Dynamic Heterogeneous Panels. Journal of the American Statistical Association 94(446), 621–634.
Pesaran, M. H. and R. Smith (1995). Estimating Long-run Relationships from Dynamic Heterogeneous Panels. Journal of Econometrics 68(1), 79–113.
Teece, D. (1982). OPEC Behavior: An Alternative View. In J. M. Griffin and D. Teece (Eds.), OPEC Behavior and World Oil Prices, pp. 64–93. Allen and Unwin, London.
Earlier versions of this paper have been presented at the University of Economics, Prague, the IIEA Fourth International Conference on Iran’s Economy, Philipps-University of Marburg, and at the Third Annual Conference of the International Association for Applied Econometrics, University of Milano-Bicocca. We are grateful to Olivier Blanchard, Paul Cashin, Mehdi Raissi and Ron Smith as well as participants at the IMF’s Asia and Pacific Department Discussion Forum for constructive comments and suggestions. Kamiar Mohaddes was a Visiting Scholar at IMF’s Asia and Pacific Department in October 2015 and September 2016.
Faculty of Economics and Girton College, University of Cambridge, UK.
Department of Economics & USC Dornsife INET, USC, USA and Trinity College, Cambridge, UK.
It is worth noting that much of the literature on oil and the macroeconomy does not use a multi-country framework, and instead uses a single-country VAR model, as representing the global economy. The majority of such studies in fact consider the effects of oil shocks exclusively on the United States, with the analysis being done mainly in isolation from the rest of the world. See, for instance, Kilian (2009). Unfortunately, these single-country models not only fail to take account of economic interlinkages and spillovers that exist between different regions, but more importantly their single-country framework does not allow them to consider heterogeneities across and within oil importers and exporters, which are arguably essential to analyzing the global oil market.
For instance, the BP Statistical Review of World Energy (June 2016) reports that 14% of the total proven oil reserves in the world is located in North America, while more than 47% is located in the Middle East, with significant heterogeneity of production costs between the two regions.
In the literature, the real oil price is typically computed by deflating the nominal oil price with the US general price index. But as our analysis shows, for global analysis such a procedure is not valid unless the law of one price holds universally, namely if
Note that long-term interest rates are not available for all countries, and short-term and long-term interest rates are not available in the case of Iran and Saudi Arabia
In particular, see Section 4.1 of Mohaddes and Pesaran (2016) for the estimates of the oil price equation and Section 4.2 for estimates of the country-specific VARX* models including discussions about lag order selection, cointegrating relations, and persistence profiles. Evidence for the weak exogeneity assumption of the foreign variables and discussion of the issue of structural breaks in the context of the GVAR-Oil model is given in Appendix B. Finally, for various data sources used to build the quarterly dataset, covering 1979Q2 to 2013Q1, and for the construction of the variables see Appendix A of Mohaddes and Pesaran (2016).
The results for the other countries in our sample, listed in Table 1, are not reported here, but are available on request.
Authors’ calculations based on data from the Sovereign Wealth Fund Institute.
In a series of papers, Pesaran and Smith (1995), Pesaran (1997), and Pesaran, Shin, and Smith (1999) show that the traditional ARDL approach can be used for long-run analysis, and that the ARDL methodology is valid regardless of whether the regressors are exogenous, or endogenous, and irrespective of whether the underlying variables are I (0) or I (1).
In the case of the ARDL models with real dividends, we initially selected the lag orders using the AIC, however, given the smoothness of the real dividend series and given that AIC selected a large number of lags, the estimates were not reliable. We therefore based the lag order selection on the Schwarz Bayesian Criterion.