Oil Prices and the Economy: A Global Perspective

37 Pages Posted: 24 May 2014

See all articles by Ronald A. Ratti

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance

Joaquin Vespignani

University of Tasmania - School of Economics and Finance

Date Written: May 1, 2014

Abstract

In this paper we introduce a global factor-augmented error correction model to quantify the interaction of oil price with the global economy. Global factors are constructed for global oil price and global interest rate, money, real output and inflation over 1999-2012. The global factors are constructed to capture developments in the largest developing and developed economies. At global level the quantity theory of money operates in the sense that global money, output and prices are cointegrated. Positive innovation in global oil price is connected with global interest rate tightening. Positive innovation in global money, CPI and outputs is connected with increase in oil prices while positive innovations in global interest rate are associated with decline in oil prices. The US, Euro area and China variables are the main drivers of global factors. Granger causality test shows that US and China variables Granger cause global interest rate, money, output and prices.

Keywords: Global interest rate, global monetary aggregates, oil prices, GFAVEC

JEL Classification: E44, E50, Q43

Suggested Citation

Ratti, Ronald A. and Vespignani, Joaquin, Oil Prices and the Economy: A Global Perspective (May 1, 2014). Crawford School Research Paper No. 41/2014, Available at SSRN: https://ssrn.com/abstract=2440986 or http://dx.doi.org/10.2139/ssrn.2440986

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance ( email )

Sydney, NSW 1797
Australia

Joaquin Vespignani (Contact Author)

University of Tasmania - School of Economics and Finance ( email )

Commerce Building,
Sandy Bay Campus
Sandy Bay, TAS, Tasmania 7005
Australia

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