Doctor of Philosophy / Department of Economics / Lance Bachmeier / In the first chapter I study the effects of oil price shocks on economic activity at the U.S. state-level, an innovative feature of this dissertation. States which rely more heavily on manufacturing or tourism are more adversely affected by adverse oil price shocks, while states which are major energy producers either benefit or experience insignificant economic changes from historically large oil price increases. Additionally, oil price increases from 1986 to 2011 have not impacted state-level economies to the same degree as increases from 1976 to 1985. This discrepancy can be attributed to a fundamental change in the structure of the U.S. economy, for example, a declining manufacturing sector or an increase in the efficiency with which energy is used in the production process. In the second chapter I explore the effects of alternative measures of energy price shocks on economic activity and examine the relative performance of these alternative measures in forecasting macroeconomic activity. The alternative energy prices I consider are: gasoline, diesel, natural gas, heating oil and electricity. I find that alternative measures of energy price shocks produce different patterns of impulse responses than oil price shocks. The overwhelming evidence indicates that alternative energy price models, excluding a model containing gasoline prices, outperforms the baseline model containing oil prices for many states, particularly at short-to-mid forecast horizons. In the third chapter, which is coauthored with Lance Bachmeier, we determine whether accounting for oil price endogeneity is important when predicting state-level economic activity. We find that accounting for endogeneity matters for in-sample fit for most states. Specifically, in-sample fit would be improved by using a larger model which contains both regular oil price and endogenous oil price movements. However, we conclude that accounting for endogeneity is not important for out-of-sample forecast accuracy, and a simple model containing only the change in the price of oil produces equally accurate forecasts. Accounting for endogeneity is particularly important in an environment in which rising oil prices were caused by a growing global economy, such as in the years 2004-2007.

This thesis is composed of three chapters, which can be read independently. The first chapter investigates how oil price volatility affects the investment decisions for a panel of Japanese firms. The model is estimated using a system generalized method of moments technique for panel data. The results are presented to show that there is a U-shaped relationship between oil price volatility and Japanese firm investment. The results from subsamples of these data indicate that this U-shaped relationship is more significant for oil-intensive firms and small firms. The second chapter aims to examine the underlying causes of changes in real oil price and their transmission mechanisms in the Japanese stock market. I decompose real oil price changes into three components; namely, oil supply shock, aggregate demand shock and oil-specific demand shock, and then estimate the dynamic effects of each component on stock returns using a structural vector autoregressive (SVAR) model. I find that the responses of aggregate Japanese real stock returns differ substantially with different underlying causes of oil price changes. In the long run, oil shocks account for 43% of the variation in the Japanese real stock returns. The response of Japanese real stock returns to oil price shocks can be attributed in its entirety to the cash flow variations. The third chapter tests the robustness of SVAR and investigates the impact of oil price shocks on the different U.S. stock indices. I find that the responses of real stock returns of alternate stock indices differ substantially depending on the underlying causes of the oil price increase. However, the magnitude and length of the effect depends on the firm size. The response of U.S. stock returns to oil price shocks can be attributed to the variations of expected discount rates and expected cash flows.

Very little has been written about the effect that oil prices have on manufacturing output in the United States. This paper aims to shed light about the effect of oil prices, oil imports, and GDP on U.S. manufacturing output through a four-variable vector autoregression and explain the timing of these shocks through impulse response functions. Empirical results find that oil prices are significant in determining manufacturing output, but manufacturing output is also significant in determining oil prices.

Traditional literature on energy economics gives a central role to exogenous political events (supply shocks) or to global economic growth (aggregate demand shock) in modeling the oil market. However, more recent literature claims that the increased precautionary demand for oil triggered by increased uncertainty about a future oil supply shortfall is also driving the price of oil. Based on this motivation, in the first chapter, we propose to build a DSGE model to explore macroeconomic consequences of precautionary demand motives in the crude oil market. The intuition behind the precautionary demand is that since firms, using oil as an input in their production process, are concerned about the future oil prices, it is reasonable to think that in the case of uncertainty about future oil supply (such as a highly expected war in the Middle East), they will buy futures and/or forward contracts to guarantee a future price and quantity. We simulate the effects of demand shocks in the oil market on macroeconomic variables, such as GDP and inflation. We find that under baseline Taylor-type interest rate rule, real oil price, inflation and output loss overshoot and go down below steady state at the next period if uncertainties are not realized. However, if the shock is realized, i.e. followed by an actual supply shock, the effect on inflation and output loss is high and persistent. Second chapter analyzes the effect of storage market on the monetary policy formulation as a response to an oil price shock. Some recent literature suggests that although high oil prices contributed to recessions, they have never had a pivotal role in the creation of those economic downturns. A general consensus is that the decline in output and employment was due to the rise in interest rates, resulting from the Fed’s endogenous response to the higher inflation induced by oil price shocks. However, traditional literature assumes that oil price shocks are exogenous to the U.S economy and they ignore the storage market for the crude oil. In this regard, a model with an endogenous (demand shock) or exogenous (supply shock) price shock may produce a totally different monetary policy proposal when there exists a market for storage for the crude oil. The rationale behind this idea is that when goods’ prices are sticky in the economy, the monetary authority can effect the level of inventories through the changes in the real interest rates. Thus, lower interest rate rules, as proposed in the literature, will cause additional oil supply scarcity in the spot market. Therefore, an optimal monetary policy that maximizes the welfare in the economy should consider the adverse affect of low interest rates on the crude oil market.

We estimate the macroeconomic performance in terms of inflation and GDP growth of Sweden in relations to oil price shocks, focusing on the differences across two periods, pre and post 2008. By using a Vector Error Correction model and linear hypothesis testing we can see short term and long term correlations between the nominal oil price and three dependent variables, GDP, CPI and GDP deflator. Our hypothesis is that the effects of oil price shocks are indifferent across our estimation period and this would be in line with previous literature.  We find that the macroeconomic factors of GDP and inflation responds differently post 2008 and by using impulse response functions (IRFs) we can see how the dependent variables responds to an oil price shock. They show that oil shocks have permanent effects in GDP and GDP deflator but transitory effects in CPI, we found short run causality for GDP and CPI but not for GDP deflator.

This paper analyzes empirically the effect of crude oil price change on the economic growth of Indian-Subcontinent (India, Pakistan and Bangladesh). We use a multivariate Vector Autoregressive analysis followed by Wald Granger causality test and Impulse Response Function (IRF). Wald Granger causality test results show that only India’s economic growth is significantly affected when crude oil price decreases. Impact of crude oil price increase is insignificantly negative for all three countries during first year. In second year, impact is negative but smaller than first year for India, negative but larger for Bangladesh and positive for Pakistan.

No / We examine the short-term price reaction of 424 UK stocks to large one-day price changes. Using the GJR-GARCH(1,1), we find no statistical difference amongst the cumulative abnormal returns (CARs) of the Single Index, the Fama–French and the Carhart–Fama–French models. Shocks ⩾5% are followed by a significant one-day CAR of 1% for all the models. Whilst shocks ⩽−5% are followed by a significant one-day CAR of −0.43% for the Single Index, the CARs are around −0.34% for the other two models. Positive shocks of all sizes and negative shocks ⩽−5% are followed by return continuations, whilst the market is efficient following larger negative shocks. The price reaction to shocks is unaffected when we estimate the CARs using the conditional covariances of the pricing variables.

Yes / This paper introduces a novel framework of partial connectedness measures to investigate contagion dynamics between different types of oil price shocks and exchange rates. Oil price shocks are persistent net transmitters of shocks within the network. It is found that the oil shock net spillovers made up most of the net connectedness values in most countries during the pre-COVID-19 period. Both oil exporters and oil importers, without any exception, were all net receivers of shocks. However, during the COVID-19 era, there were significant differences within the groups of countries. It is also observed that the oil-risk shock transmits to the other two types of oil shocks in the pre-COVID-19 and during the COVID-19 periods. The results may have potential implications for traders. / David Gabauer would like to acknowledge that this research has been partly funded by BMK, BMDW, Austria and the Province of Upper Austria in the frame of the COMET Programme managed by FFG, Austria. / The full-text of this article will be released for public view at the end of the publisher embargo on 23 Sep 2024.

Yes / This study investigates the impact of three oil price shocks on financial distress of global firms using a dataset of 8130 firms across 48 countries from 2002 to 2022. It also analyses the role of energy diversification in the relationship between oil shocks and firm distress. The findings reveal that aggregate demand and specific demand shocks increase firm distress risk, while supply shocks reduce it. Furthermore, the results suggest that energy diversification mitigates the impact of specific demand shocks on firm distress. The study also implements several robustness checks, and the results remain consistent. Potential policy implications are also discussed.

Sur la période 2006-2008, les prix de la plupart des produits agricoles ont connu une hausse spectaculaire. Un des facteurs explicatifs de cette flambée des prix est le changement climatique. En effet, l’instabilité pluviométrique et les températures extrêmes affectent négativement les récoltes agricoles et entraînent une baisse de l’offre alimentaire sur les marchés internationaux qui contribue à la hausse des prix agricoles. La flambée des prix agricoles et le changement climatique soulèvent de sérieuses préoccupations en ce qui concerne l’inflation et le bien être des populations dans le monde et surtout dans les pays pauvres dépendants des marchés internationaux. Dans un premier chapitre, nous montrons à partir de modèles économétriques sur séries temporelles que la hausse du prix du pétrole et les fluctuations du dollar américain sont les principaux facteurs de la hausse des prix internationaux agricoles. Dans un deuxième chapitre, à l’aide d’un modèle de cointégration non linéaire, nous mettons en évidence le fait que les hausses du prix du riz sur le marché international se transmettent plus rapidement aux marchés intérieurs du Burkina Faso que les baisses. Dans un troisième chapitre, nous montrons que la hausse du prix international du riz a un effet négatif sur la pauvreté et les inégalités de revenu au Burkina Faso. Le quatrième chapitre met en évidence l’effet négatif et significatif de la variabilité climatique sur la sécurité alimentaire dans les pays en développement. Cet effet apparait plus élevé dans les pays africains. Il ressort de cette thèse que les pays en développement et plus particulièrement les pays africains sont fortement vulnérables aux chocs de prix alimentaires et au changement climatique. Cette vulnérabilité s’explique par le fait que ces pays dépendent des importations alimentaires et ont un secteur agricole sensible au climat. Des initiatives de protection sociale des populations pauvres sont nécessaires compte tenu de l’accès limité à la nourriture engendré par la flambée des prix alimentaires. Des investissements viables pour une croissance agricole soutenue sont aussi nécessaires. Il peut s’agir d’investissements pour l’amélioration des infrastructures rurales et des services agricoles ainsi que pour la recherche de nouvelles pratiques agricoles moins sensibles aux aléas climatiques. / Over the period 2006-2008, the prices of most of agricultural commodities considerably increased. One of the explanatory factors of this surge in prices is climate change. Indeed, rainfall instability and extreme temperatures negatively affect agricultural crops and lead to reduced food supply in international markets, which contributes to the rise in food prices. Soaring food prices and climate change raise serious concerns regarding inflation and welfare of households in the world and especially in poor countries that depend on food imports. In a first chapter, using econometric models applied to temporal series, we show that rising oil prices and fluctuations in the U.S. dollar are the main causes of the rise in world food prices. In a second chapter, using the threshold cointegration tests, we highlight the fact that the imported rice prices in the local markets of Burkina Faso respond more rapidly to increases than to decreases in the world price. In a third chapter, we show that the increase in the world rice price has a negative effect on poverty and income inequality in Burkina Faso. The effect is lower in the rice-producing areas but remains negative. The fourth chapter highlights the significant and negative effect of climate variability on food security in developing countries. The effect is higher in African countries than in other countries. The main message of this thesis is that developing countries and especially African countries are highly vulnerable to food price shocks and to climate change. This vulnerability might be explained by the fact that these countries depend on food imports and have an agricultural sector sensitive to climate variability. Initiatives for the social protection of poor households are required due to limited food access caused by soaring food prices. Investments for sustained agricultural growth are also required. These are for example investments for the improvement of rural infrastructure and agricultural services as well as development of new agricultural practices less sensitive to climate.