1. bookVolume 21 (2021): Issue 3 (September 2021)
Journal Details
License
Format
Journal
First Published
19 Feb 2010
Publication timeframe
4 times per year
Languages
English
access type Open Access

Oil price shock in the US and the euro area – evidence from the shadow rate and the term premium

Published Online: 17 Sep 2021
Page range: 309 - 346
Received: 01 Dec 2020
Accepted: 09 Jun 2021
Journal Details
License
Format
Journal
First Published
19 Feb 2010
Publication timeframe
4 times per year
Languages
English
Abstract

The aim of this article is to investigate the consequences of oil price changes for the economy of the US and the euro area. Oil price transmission channel is assessed using Granger causalities and structural vector autoregressive (VAR) specifications (applying the Cholesky factorization and the restrictions following the method of Blanchard and Quah). The conventional oil price transmission channel is extended by a shadow policy rate and term premium, as the importance of both indicators has been growing rapidly in recent years. The results confirm that the oil price shock is not negligible in the aftermath of the Global Financial Crisis and in the subsequent period of monetary policy normalization. The findings are confirmed by the outcomes of the Bayesian VAR specification with sign restrictions. The consequences of changes in oil prices have significantly grown since the introduction of unconventional monetary instruments. The magnitude of the response of industrial production, price level and shadow interest rate to the oil price shock is strongest in the period corresponding to the unconventional monetary policy. In many cases, however, the reaction is short-lived. The conventional instrument (policy rate) in the euro area has still not been sufficient to stabilize the economy in the recent period of monetary policy normalization in the US.

Keywords

JEL Classification

ABBRITTI, M., DELL′ERBA, S., MORENO, A., (2018). Global Factors in the Term Structure of Interest Rates. International Journal of Central Banking, Vol. 14, No. 2, March 2018. Search in Google Scholar

ADRIAN, T., CRUMP, R.K., MOENCH, E., (2013). Pricing the Term Structure with Linear Regressions. Federal Reserve Bank of New York, Working paper, DOI: http://dx.doi.org/10.1016/j.jfineco.2013.04.009 Search in Google Scholar

ADRIAN, T., CRUMP, R.K., MOENCH. E., (2014). Regression-based Estimation of Dynamic Asset Pricing Model.” Journal of Financial Economics, Vol. 110, Issue 1, pp. 110–138, DOI: http://dx.doi.org/10.1016/j.jfineco.2015.07.004 Search in Google Scholar

AKRAM, Q.F., MUMTAZ, H., (2016). The Role of Oil Prices and Monetary Policy in the Norwegian Economy since the 1980s. Norges Bank Research, Working paper 1/2016. Search in Google Scholar

BAŃBURA, M., GIANNONE, D., REICHLIN, L., (2008). Large Bayesian VARs. European Central Bank Working Paper Series, No. 966/November 2008. Search in Google Scholar

BLANCHARD, O.J., QUAH, D., (1989). The Dynamic Effects of Aggregate Demand and Supply Disturbances. The American Economic Review, Vol. 79, No. 4, (Sep., 1989), pp. 655–673. Search in Google Scholar

BORIO, C., ZABAI, A., (2016). Unconventional Monetary Policies: a Re-appraisal. Bank for International Settlements BIS Working Papers, No. 570, July 2016. Search in Google Scholar

BUNDICK, B., HERRIFORD, T., SMITH, A.L., (2017). Forward Guidance, Monetary Policy Uncertainty, and the Term Premium. Federal Reserve Bank of Kansas City, working paper No. 17-07, July, DOI: http://doi.org/10.18651/RWP2017-07 Search in Google Scholar

CARBONI, G. (2014). Term Premia Implications of Macroeconomic Regime Changes. European Central Bank Working Paper Series, No. 1694/July 2014, DOI: http://dx.doi.org/10.1017/S1365100514000352 Search in Google Scholar

COENEN, G., EHRMANN, M., GABALLO, G., HOFFMANN, P., NAKOV, A., NARDELLI, S., PERSSON, E., STRASSER, G., (2017). Communication of Monetary Policy in Unconventional Times. European Central Bank Discussion Papers, No. 2080/June 2017, DOI: http://dx.doi.org/10.2139/ssrn.3043098 Search in Google Scholar

COHEN, B.H., HÖRDAHL, P., XIA, D., (2018). Term Premia: Models and Some Stylised Facts. Bank for International Settlements BIS Quarterly Review, September 2018. Search in Google Scholar

DE VIJLDER, W., (2018). The Decline of Commodity Prices: A Matter of Concern? BNP Paribas EcoWeek, No. 18–45, 7 December 2018. Search in Google Scholar

ELDER, J., SERLETIS, A., (2010). Oil Price Uncertainty. Journal of Money, Credit and Banking, Vol. 42, Issue 6, 1137–1159, DOI: https://doi.org/10.1111/j.1538-4616.2010.00323.x Search in Google Scholar

ENDERS, W. (2010). Applied Econometric Time Series. 3rd Edition., John Wiley & Sons, Hoboken. Search in Google Scholar

FORNERO, J., KIRCHNER, M., (2018). Learning about Commodity Cycles and Saving-Investment Dynamics in a Commodity-Exporting Economy. International Journal of Central Banking, Vol. 14, No. 2, March 2018. Search in Google Scholar

GAGNON, J., RASKIN, M., REMACHE J., SACK, B., (2011). The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases, International Journal of Central Banking, Volume 7, Issue 1, pp.3–43. Search in Google Scholar

GAMBACORTA, L., HOFMANN, B., PEERSMAN, G., (2012). The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross-Country Analysis. Bank for International Settlements BIS Working Papers, No. 384, August 2012, available at http://dx.doi.org/10.1111/jmcb.12119 Search in Google Scholar

GLICK, R., LEDUC, S., (2018). Unconventional Monetary Policy and the Dollar: Conventional Signs, Unconventional Magnitudes. International Journal of Central Banking, Vol. 14, No.5. Search in Google Scholar

GREENSPAN, A., (2005). Testimony of Chairman Alan Greenspan. Federal Reserve Board's semiannual Monetary Policy Report to the Congress, February 16, 2005. Search in Google Scholar

HARTWELL, Ch. A., (2018). On the impossibility of central bank independence: four decades of time- (and intellectual) inconsistency. Cambridge Journal of Economics. Vol. 43, Issue 1, pp. 61–84, DOI: https://doi.org/10.1093/cje/bex083 Search in Google Scholar

HUBERT, P., LABONDANCE, F., (2018). The Effect of ECB Forward Guidance on the Term Structure of Interest Rates. International Journal of Central Banking, Vol. 14, No. 5, December 2018. Search in Google Scholar

CHOI, S., FURCERI, D., LOUNGANI, P., MISHRA, S., POPLAWSKI-RIBEIRO, M., (2017). Oil Prices and Inflation Dynamics: Evidence from Advanced and Developing Economies. IMF Working Paper,WP/17/196, DOI: http://dx.doi.org/10.1016/j.jimonfin.2017.12.004 Search in Google Scholar

KIM, D.H., WRIGHT, H., (2005). An Arbitrage-Free Three-Factor Term Structure Model and the Recent Behavior of Long-Term Yields and Distant-Horizon Forward Rates. Finance and Economics Discussion Series, 2005-33, DOI: http://dx.doi.org/10.2139/ssrn.813267 Search in Google Scholar

KRIPPNER, L., (2012). Modifying Gaussian Term Structure Models when Interest Rates are Near the Zero Lower Bound. GAMA Woking Paper No. 2012-05. Search in Google Scholar

LANNE, M., LUOTO, J., (2019). Identification of Economic Shocks by Inequality Constraints in Bayesian Structural Vector Autoregression. Oxford Bulletin of Economics and Statistics, 0305–9049, DOI: https://doi.org/10.1111/obes.12338 Search in Google Scholar

LIPPI, F., NOBILI, A. (2008). Oil and the Macroeconomy: A Structural VAR Analysis with Sign Restrictions. CEPR Discussion Paper No. DP6830, May 2008, available at SSRN: https://ssrn.com/abstract=1143193 Search in Google Scholar

LOMBARDI, M.J., ZHU, F., (2018). A Shadow Policy Rate to Calibrate U.S. Monetary Policy at the Zero Lower Bound. International Journal of Central Banking. Vol. 14, No. 5, December 2018. Search in Google Scholar

MELOLINNA, M., (2012). Macroeconomic Shocks in an Oil Market VAR. ECB Working Paper No. 1432, May 3, 2012, available at SSRN: https://ssrn.com/abstract=2050326 Search in Google Scholar

MOUABBI, S., SAHUC, J. G., (2019). Evaluating the Macroeconomic Effects of the ECB's Unconventional Monetary Policies. Journal of Money, Credit and Banking, Vol. 51, Issue 4, 831–858, DOI: https://doi.org/10.1111/jmcb.12628 Search in Google Scholar

PAŽICKÝ, M., (2018), The consequences of unconventional monetary policy in euro area in times of monetary easing. Oeconomia Copernicana, Vol.9, Issue 4, DOI: https://doi.org/10.24136/oc.2018.029 Search in Google Scholar

PAŽICKÝ, M., (2019). Interest rate effectiveness in era of quantitative easing in euro market. International Journal of Accounting and Finance, Vol.8, Issue 4. DOI: https://doi.org/10.1504/IJAF.2018.098341 Search in Google Scholar

PEERSMAN, G., (2011). Macroeconomic Effects of Unconventional Monetary Policy in the Euro Area. European Central Bank Working Paper Series, No. 1397/November 2011. Search in Google Scholar

RONAYNE, D., (2011). Which Impulse Response Function? The University of Warwick. Warwick Economic Research Papers, No. 971, October 2011. Search in Google Scholar

RUBIO-RAMIREZ, J.F., WAGGONER, D., ZHA, T., (2010). Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference. Review of Economic Studies, 2010, Vol. 77, issue 2, 665–696, DOI: http://dx.doi.org/10.1111/j.1467-937X.2009.00578.x Search in Google Scholar

RUDEBUSCH, G.D., SACK, B. P., SWANSON, E.T., (2007). Macroeconomic Implications of Changes in the Term Premium. Federal Reserve Bank of St. Louis Review, July/August 2007, 89(4), pp. 241–69, DOI: http://dx.doi.org/10.20955/r.89.241-270 Search in Google Scholar

RUDEBUSCH, G.D., WU. T., (2004). A Macro-Finance Model of the Term Structure, Monetary Policy, and the Economy. Federal Reserve Bank of San Francisco Working Paper Series, Working paper 2003–17, DOI: http://dx.doi.org/10.1111/j.1468-0297.2008.02155.x Search in Google Scholar

SEKINE, A., TSURUGA T., (2018). Effects of commodity price shocks on inflation: a cross-country analysis. Oxford Economic Papers, Volume 70, Issue 4, October 2018, pp. 1108–1135, DOI: https://doi.org/10.1093/oep/gpy015 Search in Google Scholar

SEGAL, P., (2007). Why Do Oil Price Shocks No Longer Shock? Oxford Institute for Energy Studies, WPM 35, October 2007. Search in Google Scholar

SUSSMAN, N., ZOHAR, O., (2015). Oil Prices, Inflation Expectations, and Monetary Policy. Bank of Israel, 16 September 2015. Search in Google Scholar

VANNELLI, S., (2018). Thoughts on the Term Premium. Knowledge Leaders Capital, blog contribution from September 7, 2018. Search in Google Scholar

WANKE, S., (2017). Oil Prices and Bond Yields – Hand-in-Hand Again. KfW Research Economics in Brief, No. 140, 27 July 2017. Search in Google Scholar

WOODFORD, M., (2012). Methods of Policy Accommodation at the Interest-Rate Lower Bound. Columbia University, September 16, 2012. Search in Google Scholar

WU, J.C., XIA, F.D., (2016). Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound, Journal of Money, Credit, and Banking, 48(2–3), 253–291, 2016. Search in Google Scholar

Recommended articles from Trend MD

Plan your remote conference with Sciendo