skip to content

The Cambridge-INET Institute - continuing as the Janeway Institute

Journal Cover

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

The differential effects of oil demand and supply shocks on the global economy

Energy Economics

Vol. 44 pp. 113-134 (2014)

Abstract: We employ a set of sign restrictions on the impulse responses of a Global VAR model, estimated for 38 countries/regions over the period 1979Q2–2011Q2, as well as bounds on impact price elasticities of oil supply and oil demand to discriminate between supply-driven and demand-driven oil-price shocks, and to study the time profile of their macroeconomic effects across a wide range of countries and real/financial variables. We show that the above identification scheme can greatly benefit from the cross-sectional dimension of the GVAR—by providing a large number of additional cross-country sign restrictions and hence reducing the set of admissible models. 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, an increase in real output, a rise in interest rates, and a fall in equity prices.

Keywords: GlobalVAR(GVAR), Interconnectedness, Global macroeconomicmodeling, Sign restrictions, Impulse responses, International business cycle, Oil-demand and oil supply shocks

JEL Codes: C32, E17, F44, F47, Q41

Author links: Kamiar Mohaddes  

Publisher's Link: