A Simultaneous Equations Model for World Crude Oil and Natural Gas Markets

25 Pages Posted: 10 Jan 2006  

Noureddine Krichene

International Monetary Fund (IMF) - African Department

Date Written: February 2005

Abstract

A model for world crude oil and natural gas markets is estimated. It confirms low price and high income elasticities of demand for both crude oil and natural gas, which explains the market power of oil producers and price volatility following shocks. The paper establishes a relationship between oil prices, changes in the nominal effective exchange rate (NEER) of the U.S. dollar, and the U.S. interest rates, thereby identifying demand shocks arising from monetary policy. Both interest rates and the NEER are shown to influence crude prices inversely. The results imply that crude oil prices should be included in the policy rule equation of an inflation targeting model.

Keywords: Crude oil, Natural gas, Prices, Output, Demand, Supply, Elasticities, Interest rates, Nominal effective exchange rate, Impulse response

JEL Classification: C320, Q410

Suggested Citation

Krichene, Noureddine, A Simultaneous Equations Model for World Crude Oil and Natural Gas Markets (February 2005). IMF Working Paper No. 05/32. Available at SSRN: https://ssrn.com/abstract=874253

Noureddine Krichene (Contact Author)

International Monetary Fund (IMF) - African Department ( email )

1700 19th Street, NW
Washington, DC 20431
United States

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