News Shocks in Open Economies: Evidence from Giant Oil Discoveries

55 Pages Posted: 27 Nov 2015

See all articles by Rabah Arezki

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

University of California at San Diego ( email )

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Liugang Sheng

Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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