what happened to the oil price-macroeconomy relationship?, journal of monetary economics 38
Article price shocks – and, notable amidst those, energy cost shocks– are frequently considered amongst the most important potential threats to the global economy. However, since the 2nd half of the 1980s, energy prices have experienced very large changes, with arguably limited effects on global GDP developments. This apparent modify in the human relationship has also has been reflected in a decrease in the oil-toll elasticity of GDP (meet, for example, Hamilton 1983, Smyth 1993, Mork et al 1994 and Hooker,1996; admitting it is noteworthy to remark that this literature deals with developed economies just).
This column presents evidence that oil shocks just aren't what they used to exist when it comes to macroeconomic furnishings.
Shadows from the past: The 1970s oil price shocks
Arguably the nigh traumatic experience in terms of commodity price shocks tin can exist found in the 1970s. The cumulative increases in global energy prices observed in 1973-1974 and 1979-1980 reached, respectively, around 200% and 100%. Both shocks had specific geopolitical origins (the 1973 Yom Kippur War and the 1979 Iranian Revolution), only broader commodities' price indexes (of which energy commodities are of course an important component) show the same behaviour. Every bit can exist seen in Effigy 1, these two instances accompanied significant changes in global economic growth, i.east. a sharp deceleration in the first case, and near stagnation in the second.
Figure 1. Global growth vs. energy price Increases (% yearly changes).
Sources : Haver, International monetary fund, World Banking company.
However, and as is already apparent from Figure 1, this negative correlation present during the 1970s to the mid-1980s seem to accept changed later on that period. Commodity toll spikes take non been associated with similar growth slowdowns. If anything, the relationship would seem to be even slightly positive since the mid-1980s.
Commodity prices and growth, 1970-2010
To assess more than formally if this relationship has indeed changed, a rolling five-yr correlation window between growth and commodity prices is estimated for the menses 1970-2011 (Figure 2).
Figure 2. Correlations betwixt GDP growth and article prices changes
The growth-commodity prices relationship indeed seems to accept switched sign since the negative correlations observed until the early 1980s (which imply that an increase in commodities prices is bad for growth). What's more, the correlation has increased progressively during the 1990s to roughly stabilise since the mid-2000s.
Ane also observes a convergence between the correlations of adult and developing countries, not but in terms of its size merely as well of sign. The same pattern holds true if ane looks only at energy prices (Figure three).
Effigy 3. Correlations betwixt GDP growth and energy prices changes
A more formal analysis, namely the regression of annual Gdp growth on past GDP growth and commodity price changes), suggests article prices take become increasingly positively correlated with GDP since the 1970s (Figure 4). Moreover, larger relative changes in the coefficient have been observed in developing economies.
Figure iv. The upshot of commodity toll changes on growth
Again, this holds if we consider merely energy prices (Figure 5).
Effigy five. The effect of energy-cost changes on growth
Developments among different developing regions
Developing economies are, of course, a very diverse universe, which goes from commodity-exporting Nigeria to commodity-importing India. We will look at wide regional developing-country aggregates, to meet what differences, if whatsoever, they reveal concerning their reaction to commodity-toll shocks.
Figure six below plots the correlations betwixt Gross domestic product growth and commodity price changes. Even with significant regional variation, in that location is a common upwards trend to a positive correlation beyond all developing regionsane. Correlations using changes of article free energy prices show the same design (Effigy 7).
Figure 6. Correlations between GDP growth and commodity-price changes by region
Figure 7. Correlations betwixt GDP growth and energy-price changes by region
A regression analysis like to the one described above likewise supports the previous determination. On average, the regression coefficient associated with commodity prices has go increasingly positive since the 1970s beyond developing regions (run across Figure eight, which shows the coefficients for energy prices).
Figure viii. The effect of energy-price changes on growth beyond developing regions
Decision
This cavalcade argues that in that location are signs that the global economic system is more than resilient (albeit certainly not allowed) to commodity-price shocks than usually thought. This effect finds back up in both correlations and regression assay, and had already been observed in several earlier works looking at the oil-price elasticities of Gdp. Besides, this is a decision that holds true for both developed and developing regions, and too broadly among different developing regions.
It is not the aim of this piece to wait at reasons behind the correlation patterns, but some intuitively come to mind. One could be the greater commodity efficiency since the 1970s, or more than robust policy frameworks and responses, such every bit greater central bank independence and aggrandizement-fighting capacities (Bernanke et al, 1997), floating exchange rates, or sovereign wealth funds and fiscal rules. Additionally, a more than geographically diversified and arable fix of sources for energy commodities, with the 'shale' oil and gas revolution, could be behind the changes in correlations.
Finally, and given the importance of developing economies for global growth, information technology should be pointed out that, while they are yet converging to developed-state income levels, which implies that their growth procedure could become more commodity-intensive in some areas, they are besides to experience this procedure with new technologies that are less commodity-intensive than those used past adult economies when they were at a like level of development. Additionally, equally development implies a convergence to an economic construction more concentrated on services and with less need of infrastructure investment, their sheer additional demand for commodities volition abate. On residuum, those forces combined may result in an even smaller sensitivity to commodity shocks.
Editor'southward notation: The views expressed hither are the author'due south own, and practise not necessarily represent those of his current or previous employers.
References
Bernanke, B, M Gertler and G Watson (1997), "Systematic Monetary Policy and the Effects of Oil Cost Shocks", Presented at the Brookings Panel on Economic Activity, March 27-28, Washington, DC.
Hamilton, J (1983), "Oil and the Macroeconomy since World State of war II", Journal of Political Economy 91, pp. 228-248.
Hooker, M, (1996), "What Happened to the Oil Cost-Macroeconomic Relationship?", Periodical of Monetary Economics38, pp. 195-213.
Mork, K, Ø Olsen, and H Mysen (1994), "Macroeconomic Responses to Oil Price Increases and Decreases in OECD Countries", Energy Journal xv(4), pp. xix-35.
Smyth, D., (1993), "Energy Prices and the Amass Production Function," Energy Economic science fifteen, pp. 105-110.
i We use hither the IMF breakdown for developing regions: ASIA is developing Asia, CEE for (not-EU) central eastern Europe, CIS for Commonwealth of Independent States, LAC for Latin America and the Caribbean, MEN for Middle East and north Africa, SAS for Southward Eastern asia and SSA for sub-Saharan Africa.
Source: https://voxeu.org/article/commodity-prices-and-growth-changing-relationship
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