News Shocks in Open Economies: Evidence from Giant Oil Discoveries

55 Pages Posted: 27 Nov 2015  

Rabah Arezki

International Monetary Fund (IMF)

Valerie A. Ramey

University of California at San Diego; National Bureau of Economic Research (NBER)

Liugang Sheng

Chinese University of Hong Kong

Multiple version iconThere are 2 versions of this paper

Date Written: September 2015

Abstract

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

Suggested Citation

Arezki, Rabah and Ramey, Valerie A. and Sheng, Liugang, News Shocks in Open Economies: Evidence from Giant Oil Discoveries (September 2015). IMF Working Paper No. 15/209. Available at SSRN: https://ssrn.com/abstract=2696067

Rabah Arezki (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Valerie A. Ramey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of California at San Diego ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-2388 (Phone)

Liugang Sheng

Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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