Oil Prices and the Global Economy: Is It Different This Time Around?

November 8, 2016

Preview Citation

Format: Chicago

Kamiar Mohaddes, and M. Hashem Pesaran Oil Prices and the Global Economy: Is It Different This Time Around?, (USA: International Monetary Fund, 2016) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The recent plunge in oil prices has brought into question the generally accepted view that lower oil prices are good for the United States and the global economy. In this paper, using a quarterly multi-country econometric model, we first show that a fall in oil prices tends relatively quickly to lower interest rates and inflation in most countries, and increase global real equity prices. The effects on real output are positive, although they take longer to materialize (around four quarters after the shock). We then re-examine the effects of low oil prices on the U.S. economy over different sub-periods using monthly observations on real oil prices, real equity prices and real dividends. We confirm the perverse positive relationship between oil and equity prices over the period since the 2008 financial crisis highlighted in the recent literature, but show that this relationship has been unstable when considered over the longer time period of 1946–2016. In contrast, we find a stable negative relationship between oil prices and real dividends which we argue is a better proxy for economic activity (as compared to equity prices). On the supply side, the effects of lower oil prices differ widely across the different oil producers, and could be perverse initially, as some of the major oil producers try to compensate their loss of revenues by raising production. Taking demand and supply adjustments to oil price changes as a whole, we conclude that oil markets equilibrate but rather slowly, with large episodic swings between low and high oil prices.

Subject: Commodities, Financial institutions, Financial services, Long term interest rates, Oil, Oil prices, Oil production, Prices, Production, Stocks

Keywords: Dividends, Economic growth, Equity price, Equity prices, Global, Global oil markets, International business cycle, Long term interest rates, Oil, Oil price, Oil price coefficient, Oil price shock, Oil price variable, Oil price volatility, Oil prices, Oil production, Oil supply, Price coefficient, Price relationship, Rate of change, Real oil price, Standard error band, Stocks, Term interest rate, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/210
Stock No:

WPIEA2016210
ISBN:

9781475552034
ISSN:

1018-5941

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