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Faculty of Economics

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Cashin, P., Mohaddes, K., Raissi, M. and Raissi, M.

The Differential Effects of Oil Demand and Supply Shocks on the Global Economy

CWPE1249

Abstract: We employ a set of sign restrictions on the generalized impulse responses of a Global VAR model, estimated for 38 countries/regions over the period 1979Q2.2011Q2, to discriminate between supply-driven and demand-driven oil-price shocks and to study the time profile of their macroeconomic effects for different countries. The results indicate that the economic consequences of a supply-driven oil-price shock are very different from those of an oil-demand shock driven by global economic activity, and vary for oil-importing countries compared to energy exporters. While oil importers typically face a long-lived fall in economic activity in response to a supply-driven surge in oil prices, the impact is positive for energy-exporting countries that possess large proven oil/gas reserves. However, in response to an oil-demand disturbance, almost all countries in our sample experience long-run inflationary pressures and a short-run increase in real output.

Keywords: Global VAR (GVAR), interconnectedness, global macroeconomic modeling, impulse responses, international business cycle, oil-demand and oil-supply shocks

JEL Codes: C32 E17 F44 F47 Q41

Author links: Kamiar Mohaddes  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1249.pdf

Open Access Link: https://doi.org/10.17863/CAM.1014