Oil prices and economic activity in BRICS and G7 countries
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Oil prices and economic activity in BRICS and G7 countries Erdem Kilic1 · Serkan Cankaya2 © Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract The effect of oil prices on countries’ economic activity has been the center of attention for decades. The empirical link between oil prices and economic activity has been steadily investigated during this time period but the measured outcomes have revealed mixed results and been inconsistent. This study examines the effect of oil prices on economic activity for Brazil, Russia, India, China, and South Africa (BRICS) and Group of Seven (G7) countries in both short-run and long-run relationships by estimating a maximum likelihood structural vector autoregression model. The model shows that a positive shock to oil prices tends to affect the monetary aggregate in Brazil, Canada, France, Germany, and Russia. The effect on interest rate spread is most significant in India and Russia. Impulse response functions display almost no effect on the gross domestic product in the US and China. A positive response on the consumer price index is observed mostly for developed countries. The response of real exchange rate reveals a positive effect on all countries in varying degrees, with the exception of the US and South Africa. Finally, Granger causality tests were conducted with proper allowance for the non-stationarity of the data. The findings illustrate that the Russian economy is among the economies that are most significantly affected by oil price fluctuations for almost all the selected variables. The models also reveal that the effect of oil price shocks on the US’s and China’s economic activities is only limited to the effect on real exchange rates. Other variables show no or limited reactions to oil prices. We also used the Markov switching maximum likelihood vector autoregression models, which reveals similar results. Keywords Oil price shocks · Macroeconomic fluctuations · Structural vectorautoregression model (SVAR) · Markov switching model (MS VAR)
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Erdem Kilic [email protected]
1
MEF University, Istanbul, Turkey
2
Istanbul Commerce University, Istanbul, Turkey
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E. Kilic, S. Cankaya
1 Introduction The relationship between oil prices and the macroeconomy has been the center of attention for decades. The decline in oil prices over the last few years has generated renewed interest in this ongoing debate. Some argue that oil prices have a major effect on macroeconomic asymmetries, whereas others argue that oil prices no longer have that kind of power over macroeconomic activity due to changes in countries’ economic structures. Several academic studies have been conducted to assess this connection. Some studies choose multiple variables that are believed to represent the macroeconomy in general, such as inflation, exchange rates, industrial production, interest rates, and the monetary aggregate or gross domestic product (GDP). Alternatively, studies choose to focus on a single variable such as stock market activities. Another distinction among studies
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