News Shocks in Open Economies: Evidence from Giant Oil Discoveries
55 Pages Posted: 27 Nov 2015
Date Written: September 2015
This paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output - the delay between a discovery and production is on average 4 to 6 years. We first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery. We then estimate the effects of giant oil discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time.
Keywords: news shocks, current account and business cycles, production, investment, GDP, economy, capital, General, Open Economy Macroeconomics
JEL Classification: E00, E00, F32, F32, F41, F41
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