BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
What is the role of Emerging Asia in global oil prices?
Abstract: This paper studies the effects of demand shocks caused by
Emerging Asian (EMA) countries on oil prices over the past two decades,
using vector autoregression models. The analysis builds on previous work
done on identifying different types of oil shocks using structural time
series methods. However, uniquely, this paper introduces a commodity demand
indicator for EMA economies that is based on data independent of oil
production and consumption data, thus properly accounting for oil demand
pressures stemming from macroeconomic conditions in the EMA economies and
the rest of the world. The analysis strongly suggests that EMA demand
shocks have had a persistent and statistically significant effect on the
level and variation of global oil prices over the past two decades. This
result differs from some of the previous literature and hence proves that
the choice of oil demand indicator in an oil-market VAR makes a material
difference for the results. Furthermore, tentative evidence suggests that
the effect of EMA demand is mainly driven by demand dynamics in China. The
results of the benchmark model are robust to different sample periods and
to variations in the definition of the oil demand indicators, as well as to
an alternative identification strategy based on sign restrictions.
Keywords: macroeconomic shocks; oil markets; sign restrictions; vector autoregression; (follow links to similar papers)
JEL-Codes: C32; E32; Q43; (follow links to similar papers)
26 pages, September 29, 2014
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