Working Paper nº 06/04

Transcription

1 Faculad de Ciencias Económicas y Empresariales Universidad de Navarra Working Paper nº 06/04 Oil Prices, Economic Aciviy and Inflaion: Evidence for Some Asian Counries Juncal Cunado and Fernando Perez de Gracia Faculad de Ciencias Económicas y Empresariales Universidad de Navarra

2 OIL PRICES, ECONOMIC ACTIVITY AND INFLATION: EVIDENCE FOR SOME ASIAN COUNTRIES Juncal Cunado and Fernando Perez de Gracia Working Paper No.06/04 April 2004 JEL No. E32, Q43, O53 ABSTRACT In his paper we sudy he oil prices-macroeconomy relaionship by means of sudying he impac of oil price shocks on boh economic aciviy and consumer price indexes for six Asian counries over he period 1975Q1-2002Q2. The resuls sugges ha oil prices have a significan effec on boh economic aciviy and price indexes alhough he impac is limied o he shor-run and more significan when oil price shocks are defined in local currencies. Moreover, we find evidence of asymmeries in he oil prices-macroeconomy relaionship for some of he Asian counries. J. Cunado Universidad de Navarra Depo. de Méodos Cuaniaivos Campus Universiario Pamplona jcunado@unav.es F. Perez de Gracia Universidad de Navarra Depo. de Economía Campus Universiario Pamplona fgracia@unav.es 1

3 ACKNOWLEDGEMENTS The auhors graefully acknowledge he useful commens and suggesions from wo anonymous referees. Financial suppor from he Miniserio de Ciencia y Tecnología (SEC , Spain) and Plan de Invesigación de la Universidad de Navarra (PIUNA; ) is also acknowledged. The usual disclaimer applies. 2

4 1. Inroducion Among he mos severe supply shocks hiing he world economies since World War II were sharp increases in he price of oil and oher energy producs. Oil price shocks receive imporan consideraion for heir presumed role on macroeconomic variables. 1 They are included in several models such as hose of Rasche and Taom (1981), Bruno and Sachs (1982) and Hamilon (1988). Furhermore, hey have been credied wih affecing he naural rae of unemploymen (e.g., Caruh e al., 1998; Davis and Haliwanger, 2001; Phelps, 1994), reducing he role of echnology shocks in real business cycle models (Davis, 1986) and depressing irreversible invesmen hrough heir effecs on uncerainy (Ferderer, 1996). Thus, from a heoreical poin of view, here are differen reasons why an oil shock should affec macroeconomic variables, some of hem calling for a non-linear specificaion of he oil price-macroeconomy relaionship. For example, he oil shock can lead o lower aggregae demand since he price rise redisribues income beween he ne oil counries which are ne oil imporers and exporers. Second, he oil price increase reduces aggregae supply since higher energy prices mean ha firms purchase less energy; consequenly, he produciviy of any given amoun of capial and labor declines and poenial oupu falls. The decline in facor produciviy implies ha real wages will be lower. If some labor supply is wihdrawn volunarily as a resul, poenial oupu will be lower han i would oherwise be, hus compounding he direc impac of lower produciviy. Furhermore, i may have a nonlinear effec on economic aciviy if i affecs hrough secoral reallocaions of resources 1 Recenly, Brown and Yücel (2002) survey he heory and evidence beween economic aciviy and oil prices. 3

5 or depressing irreversible invesmen hrough heir effecs on uncerainy (Ferderer, 1996). 2 From an empirical poin of view, considerable research finds ha oil price shocks have affeced oupu and inflaion (e.g., Hamilon, 1983, 1988, 1996, 2000; Hooker, 1996, 1999, 2002; Huningon, 1998; Kahn and Hampom, 1990; Taom, 1988; Mork, 1989, 1994). Research also suppors he view ha hese shocks have been an imporan source of economic flucuaion over he pas hree decades (Kim and Loungani, 1992). However, here are various quesions, which are sill far from a consensus. Firs, empirical evidence shows ha oil prices fail o Granger cause macroeconomic variables when daa samples are exended pas he mid-80s, due o he nominal price decreases beginning in 1981 and wide swings, following he marke collapse in Several auhors argue ha his breakdown of he oil prices-macroeconomy relaionship reveals ha he relaion beween hese variables is nonlinear and propose differen nonlinear specificaions of his relaion (e.g., Lee e al., 1995 and Hamilon, 1996). 3 Second, and in an inernaional conex, an oil shock may have a differenial impac on each of he counries due o some variables such as heir secoral composiion, heir relaive posiion as oil imporer or exporer or heir differenial ax srucure. 2 See Mork (1994) for a furher discussion of various ransmission mechanisms. 3 One of he proposed specificaions is an asymmeric relaionship where oil price increases have a significan effec on macroeconomic variables while his does no occur for oil price decreases (Mork, 1989). However, oher auhors (Lee e al., 1995; Hamilon, 1996) argue ha he asymmeric relaionship proposed by Mork (1989) offers a relaively poor fi o daa afer 1986 and propose alernaive asymmeric and nonlinear relaionships. 4

6 The main goal of his paper is o analyze he oil price-macroeconomy relaionship by means of applying coinegraion and Granger causaliy ess on he oil price-inflaion rae and oil price-producion growh rae relaionships for six Asian counries using quarerly daa for he period 1975Q1-2002Q2. In order o accoun for he possible asymmery and oher ype of nonlineariies beween oil prices and macroeconomic variables, we shall use differen ransformaions of oil price daa, each of one suggesing a differen channel hrough which oil prices may affec indusrial producion levels. There are several reasons ha jusify he ineres in he energy price and macroeconomic relaionship in Asian counries. Firs, i is becoming more imporan o undersand he macroeconomic behavior in Asian counries, as recognized by he 1997 crises and is impac on oher economies. Second, mos of he papers on he effec of oil prices are applied o he US case or OECD counries and only a few papers sudy he Japanese case (Lee e al., 2001; Huchison 1993; Takenaka, 1991) and oher Asian economies (Abeysinghe, 2001). Third, in our sample we include boh a ne oil exporer (Malaysia) and ne oil imporers (Japan, Singapore, Souh Korea, Philippines and Thailand), which could help us o examine wheher he oil price macroeconomy relaionship in emerging Asian economies depends on he differen ne impor or expor behavior of each counry. 4 4 Alhough here are a few sudies (see for example Mork e al., 1994 and Abeysinghe, 2001) in which a slighly differen relaionship beween oil prices and macroeconomic variables is found for oil imporer and oil exporer counries, his is no a conclusive resul. In his paper, we also find ha he relaionship beween oil prices, economic aciviy and consumer prices seems o be less significan for Malaysia han for he res of he counries. However, i is difficul o reach general conclusions from his sole resul and alhough he resuls seems o sugges ha he response of he oil-exporing counries may differ from ha of oil-imporing counries, furher research is needed o obain a more reliable conclusion. 5

7 The plan of he paper is as follows. In Secion 2 we briefly presen he main feaures on oil price marke in order o jusify he proxy variables of oil price shocks we use in he empirical analysis. Secion 3 covers he empirical analysis and Secion 4 provides some concluding remarks. 2. A firs look a oil price daa The choice of oil price variables is difficul and, as we shall show laer, imporan. Naional oil prices have been influenced by price-conrols, high and varying axes on peroleum producs, exchange rae flucuaions (such as he imporan devaluaions afer he Asian crisis in mos of he counries in our sample) and naional price index variaions. All he differenial characerisics which influence he effecive oil price ha each of he counries face raise grea difficulies in measuring he appropriae oil price variable for each counry. Thus, mos of he empirical lieraure which analyze he effec of oil price shocks in differen economies 5 use eiher he $US world price of oil as a common indicaor of he world marke disurbances ha affec all counries (see for example, Burbidge and Harrison, 1984) or his world oil price convered ino each respecive counry's currency by means of he marke exchange rae (see for example Mork e al. (1994) for OECD counries or Abeysinghe (2001) for Asian counries). The main difference beween he wo variables is ha only he second one akes ino accoun he differences in he oil price ha each of he counries faces due o is exchange rae flucuaions or is inflaion levels. In his paper we use hese wo variables in order o differeniae wheher each oil price shock reflecs he world oil price evoluion or could 5 Mos of he papers which analyze his issue for he US case use he world price of crude oil (Hamilon, 1996) or in real erms by means of dividing his variable by a price index for all commodiies (Hooker, 1999). 6

8 be due o oher facors such as exchange rae flucuaions or naional price index variaions. The world oil price was deflaed using he price of all commodiies and he domesic (local) oil prices were deflaed using he inflaion indicaor of each counry. All he variables excep proxies for economic aciviy in Malaysia, Thailand and Philippines have been obained from he Inernaional Financial Saisics (Inernaional Moneary Fund). 6 Figure 1 shows for each of he Asian counries, he evoluion of boh he real oil price expressed in $US and in he local currency over he period 1975Q1-2002Q2. In all he series we observe he effecs of he hree main negaive oil shocks ( , 1990, ) and he fall in oil prices afer he marke collapsed in mid-eighies. However, i is worh menioning he differen evoluion of oil prices when hey are expressed in $US or in each of he counries' currencies. As observed in he figure, one of he main differences beween hese wo variables is due o he persisence of he dollar price in he firs half of he 1980s due o he behavior of he exchange raes of he Asian currencies agains he $US. Thus, while real oil prices in domesic currencies presen a downward rend since 1980, he real oil price expressed in $US exhibi some increases in , 1990 and [Inser Figure 1] [Inser Table 1] Table 1 presens he correlaion coefficiens among local oil prices and oil prices in $US. The able shows a high degree of correlaion boh among he local oil prices for all Asian 6 See Daa Appendix for deails. Quarerly daa prior o 1975 are no available for economic aciviy for all he counries. 7

9 counries - in no case, he coefficien is lower han and among local oil prices and $US prices excep for he case of Malaysia -wih a correlaion coefficien of The differenial behavior of oil price movemens before and afer he las period is characerized by large price declines and high volailiy- and he apparen asymmeric response of economic aciviy indexes o oil price shocks in many economies have led researchers o explore differen oil-oupu specificaions in order o reesablish he relaionship beween hese variables (see for example, Mork, 1989; Lee e al., 1995; Hamilon, 1996). Following his lieraure, we define he nex four variables expressed boh in $US and in each of he local currencies: - oil : quarerly changes of real oil prices, ha is, he convenional firs difference ransformaion of oil price variables (in logs): oil ln oil ln oil, (1) 1 where oil is he real oil price in period in $US or in local currency, as defined above. A significan relaionship beween his variable and economic aciviy would lead o a linear oil-oupu relaionship. - oil + : real oil price increases, oil max 0, oil ), (2) ( In his case, we rea in a differen way oil price increases and decreases, ha is, we separae oil prices changes ino negaive and posiive changes in a believe ha oil price increases may have a significan effec on macroeconomic variables even hough his migh no occur for oil price decreases. - NOPI : ne oil price increases (expressed in real erms) defined as he quarerly percenage change in real oil price levels from he pas 4 (and 12) quarers high if ha is 8

10 posiive and zero oherwise (NOPI4 and NOPI12). These variables are proposed by Hamilon (1996), who argues ha if one wans a measure of how unseling an increase in he price of oil is likely o be for he spending decisions of consumers and firms, i seems more appropriae o compare he curren price of oil wih where i has been over he previous years raher han during he previous quarer alone. Hamilon hus proposes o use he amoun by which he log oil price in quarer exceeds is maximum value over he previous periods; if oil prices are lower han hey have been a some poin during he mos recen years, no oil shock is said o have occurred. Tha is, NOPI 4 NOPI12 max 0,(ln( oil ) ln( max( oil 1 max 0,(ln( oil ) ln( max( oil, oil 1 2,..., oil, oil 12 3 ))), oil 4 ))), (3) Wih his variable, we aim o check for a causal relaionship beween "imporan" oil price increases and macroeconomic variables. - SOPI : scaled oil price increases (where oil price is expressed in real erms), proposed by Lee e al. (1995). They focus on volailiy arguing ha an oil shock is likely o have greaer impac in an environmen where oil prices have been sable han in an environmen where oil price movemens have been frequen and erraic because price changes in a volaile environmen are likely o be soon reversed. In order o consruc his variable, a GARCH(1,1) model is esimaed: oil k j1 oil j j I N(0, h ) h SOPI max(0, ˆ 2 / h 1 hˆ ). (4) A significan relaionship beween his variable and economic aciviy implies ha a "cerain" oil price increase will cause a decrease in economic aciviy, while a price increase in a period of high volailiy is less likely o cause i. 9

11 The oil price shock proxies (e.g., oil price increases, posiive oil price increases, NOPI4 and SOPI) defined in $US are ploed in Figure 2 7 and he correlaion coefficiens among hem are repored in Table 2. As we can see in he figure, he oil price shock proxies deec quie well he hree main oil shocks in he period 1975Q1-2002Q2. The firs one akes place in when he Iranian revoluion disruped oil supplies and he price rose from $20 o $30. A second one followed Iraq s invasion of Kuwai in 1990, when prices wen from $16 o $26. Finally, prices grew up from $12 o $24 in However, we can also deec some differences among each of he variables. For example, we can observe ha he variable oil + akes a much higher value afer he increase in oil prices afer he invasion of Kuwai (see 1990Q3) han he NOPI variable, a difference which is due o he decrease in oil prices occurred in 1990Q2. [Inser Figure 2] [Inser Table 2] 3. Empirical analysis In his Secion we examine he oil price-macroeconomy relaionship, by means of esimaing he impac of oil prices on boh economic aciviy and consumer price indexes for some Asian counries during he period 1975Q1-2002Q2. 8 The esimaion sraegy is as follows. Firs, we check for saionariy in each variable. Second, we analyze wheher a long-run relaion exiss beween he series esing for bivariae coinegraion beween 7 Alhough all hese variables are also consruced in he domesic currency of each of he Asian counries, we do no plo hem bu are available by reques from he auhors. 8 Inflaion rae () is calculaed from Consumer Price Index (CPI) and economic aciviy (y) is proxied by Indusrial Producion Index in Japan and Souh Korea, Manufacuring Producion Index in Singapore, and quarerly real GDP in Malaysia, Thailand and Philippines. 10

12 oil prices and boh CPI and producion. Third, we sudy he shor-run dynamic behavior beween oil prices and macroeconomic variables checking for Granger causaliy. Finally, we es for asymmeries in he oil price changes and economic growh and inflaion relaionships. a. Uni-roo and coinegraion resuls As a firs sep of he empirical analysis, uni-roo ess have been carried ou for all of he variables: oil prices (boh in $US and in local currencies), CPI and economic aciviy. Table 3 shows he resuls from applying he Phillips - Perron (1988) uni-roo ess for each of he variables. The inspecion of he resuls in Table 3 allows us o conclude ha CPI, economic aciviy and oil prices may be considered inegraed of order one (I(1)) variables in all counries. 9 [Inser Table 3] As all he variables exhibi a uni-roo, we esed for bivariae coinegraion using 2 alernaive approaches. Firs, he Phillips - Ouliaris (1990) es based on he analysis of he saionariy of he residuals of he long-run relaionship beween he variables As shown in he able, we canno rejec he null hypohesis of uni-roo, excep for he case of he CPI in Japan when an inercep is included in he model. However, as we explain in Table 3, based on he emporal evoluion of his series, is correlogram and he significaiviy of he ime rend in he model wih and inercep and a linear ime rend (iii), we conclude ha his variable is beer characerized by an I(1) process. The same uni-roo ess have been applied o he firs differences of he variables (CPI, Oil prices and Economic Aciviy) and in all cases we rejeced he null hypohesis of uni-roo. 10 Akaike s informaion crierion (AIC) is used o deermine he opimal lag lengh. Following Lukepohl (1982) and McMillin (1991), AIC is used o he lag lengh of he coinegraing relaionship. The opimal lag lengh chosen is one, which yields minimum AIC: AIC = log(de k ) + (2d 2 k/t), k=1,2,..., n 11

13 Second, in order o accoun for possible problems associaed wih srucural breaks, we use he Gregory and Hansen (1996) es. Gregory and Hansen have developed residualbased coinegraion ess ha allow for an endogenously deermined srucural break in he coinegraion relaionship. We consider boh a level shif and a level shif wih rend models, which ake he form 11 : y 1, 1D y 2, u, (5) y1 u, (6), 1D y2, where D is he dummy variable D 0, 1, if if T T B B, where he unknown parameer T B denoes he iming of he change poin; represens he coinegraing inercep before he regime shif, 1 denoes he change in he inercep a he ime of he shif, represens he coinegraing slope coefficien and represens a linear ime rend. Once we have esimaed (5) and (6), he second sep is o es if u is I(0) or I(1) via he Augmened Dickey Fuller or Phillips Perron (1988) echniques. Tables 4 and 5 show he resuls of he bivariae coinegraion ess beween he world oil price in $US and each of he naional oil prices and boh CPI and economic aciviy. The general resul of his analysis is ha here is no a coinegraing long-run relaionship where d refers o he number of variable in he model; T is he number of observaion; m refers o he maximum lag lengh considered; de k is he deerminan of k ; and k is he esimaed residual variancecovariance marix for lag k. Use of he AIC crierion suggess a lag lengh of 1 o 4 quarers for he esimaed period 1975Q1-2002Q2. When we use he Schwarz s crieria he resuls are similar and all he variables are I(1). 11 In our case, economic aciviy and inflaion rae (y 1, ) are regressed on oil prices (y 2, ). 12

14 beween oil prices and economic aciviy, which suggess ha he impac of oil shocks on hese variables is limied o he shor-run. 12 We do no find evidence of a long-run relaionship beween hese variables even when we allow for a srucural break. [Inser Tables 4 and 5] b. Granger causaliy ess Since coinegraion does no exis eiher beween economic aciviy and oil prices or beween consumer prices and oil prices, we use he following formulaion in order o es for Granger causaliy from oil prices o economic growh raes and inflaion raes, ha is, we specify a shor-run relaionship beween he variables esimaing he following model in which all he variables are saionary: y oili k k oil i 1 iyi 2i NOPI 4i, (7) i1 i1 NOPI12 i SOPI i 0 CPI oili k k oil i 1 icpi i 2i NOPI 4i, (8) i1 i1 NOPI12 i SOPI i 0 12 As shown in he ables, we canno rejec he non coinegraion null hypohesis, excep for he oil pricesconsumer price indexes relaionship in Japan (when an inercep is included in he model and oil prices are expressed in $US). However, as we explain in Table 4 and based on he resuls of he uni-roo ess in Table 3, he correlogram of he residuals of he long-run relaionship beween CPI and oil prices and he significaiviy of he ime rend in model (iii), we conclude ha here is no significan evidence o assume ha coinegraion exiss beween consumer and oil prices in Japan. 13

15 where is he difference operaor, k is he number of lags (chosen according o he AIC crieria), he dependen variable are boh he growh rae of producion and he inflaion raes, and as explanaory variables we include lagged values of he dependen variable and of each of he consruced proxies of oil price shocks (oil, oil +, NOPI4, NOPI12, SOPI). 13 Failing o rejec he null hypohesis 21 = 22 =...= 2k =0 implies ha oil price changes do no Granger cause economic growh or inflaion raes. Table 6 shows he resuls of hese Granger causaliy ess from oil price shocks expressed in $US o economic growh raes. According o hese resuls, oil price changes do no cause economic growh raes in any of he counries. However, when he alernaive proxy variables of oil shocks are used, a significan relaionship is found in he cases of Japan and Souh Korea. Therefore, here seems o be a shor-run relaionship beween oil prices in $US and economic aciviy, in which oil price changes affec economic growh raes, alhough he relaionship is more likely o be asymmeric and non-linear han linear. In Secion 3c we es for asymmeries in he oil prices-macroeconomy relaionship. However, when oil prices are expressed in local currency (see Table 7), we find evidence of Granger causaliy from oil price shocks o economic growh raes in Japan, Souh Korea and Thailand, when we allow for nonlinear ransformaions of oil prices. Furhermore, he relaionship beween oil price shocks and economic growh raes is more significan when oil price shocks are defined in local currency han when defined in $US. [Inser Tables 6 and 7] 13 Recall ha he defined proxy variables for oil price changes are saionary ransformaions of oil prices in $US and in each of he domesic currencies, which are I(1) variables. 14

16 As far as he oil prices-consumer price indexes relaionship is concerned, Table 8 presens he Granger causaliy ess from oil price shocks expressed in $US o inflaion raes. Based on hese resuls, we find evidence of causaliy from oil price shocks o inflaion raes in he cases of Japan, Singapore and Thailand. When we define oil price shocks in local currency (see Table 9), we find evidence of causaliy for all six Asian economies. As before, he relaionship beween oil price shocks and inflaion raes is more significan when oil price shocks are defined in domesic currencies and when a non-linear relaionship is specified beween he wo variables. [Inser Tables 8 and 9] c. Tesing for asymmeric effecs The asymmeric relaionship beween oil price shocks and macroeconomic variables is invesigaed in many papers. For example, several sudies find ha rising oil prices seem o reard economic aciviy by more han falling oil prices simulae i (see for example Mork, 1989; Lee e al., 1995; Hamilon, 1996; Davis and Haliwanger, 2001, for he US case and Mork e al., 1994, for seven OECD counries). In his paper, and in order o es for asymmeries, we follow Mork (1989) and Mork e al. (1994) and ener in he same equaion real oil price increases and decreases as separae variables deermining economic growh and inflaion raes. Thus, our bivariae esimaion equaions are: y k k k 0 1iyi 2ioili 2ioili, (9) i1 i1 i1 CPI k k k 0 1iCPI i 2ioili 2ioili, (10) i1 i1 i1 15

17 where oil - are price decreases, ha is, i equals he oil-price growh rae when i is negaive and i is 0 oherwise, i.e. oil min( 0, oil ). (11) Wih his specificaion, we can carry ou convenional ess of he following hypoheses: 2i 2i, i 1,2,... k. (12) In Tables 10 and 11 we display he resuls obained by carrying ou his es of pairwise equaliy of he coefficiens. As far as he economic growh rae-oil price changes relaionship is concerned, he main resuls sugges ha here is evidence of an asymmeric relaionship only for he case of Souh Korea when oil prices are measured in domesic currency. Moreover, we esimae equaions (9) and (10) including ne oil price increases (NOPI) ogeher wih oil price decreases and es wheher each of he coefficiens of NOPI variables is equal o is corresponding coefficien of oil price decreases, i.e., we es he null hypohesis (12). In his case, as shown in Tables 10 and 11, we also find evidence of an asymmeric relaionship beween inflaion rae and oil price changes in he cases of Souh Korea and Malaysia. [Inser Tables 10 and 11] 4. Concluding remarks This paper analyzes he oil prices-macroeconomy relaionship by means of sudying he impac of oil price shocks on boh inflaion and economic growh raes for some Asian counries over he period 1975Q1-2002Q2. Besides he relevance of his analysis in he conex of he new oil shock occurred in 2000, he major conribuion of his paper is he 16

18 use of differen oil-oupu and oil-cpi specificaions in order o measure he impac of oil prices on boh inflaion and economic growh raes for some Asian counries. The main resuls may be summarized as follows. Firs, we obain differen resuls depending on wheher we use a world real oil price (expressed in $US) or a local real oil price for each of he counries measured in he domesic currency. In fac, he impac is higher when oil prices are measured in local currency, which could be due o he role of exchange raes or naional price variaions on macroeconomic variables. Second, here is no a coinegraing long-run relaionship beween oil prices and economic aciviy, which suggess ha he impac of oil shocks on hese variables is limied o he shor-run. We do no find evidence of a long-run relaionship beween hese variables even when we allow for a srucural break around mid-eighies in order o capure he oil marke collapse occurred around Third, when analyzing shor-run relaionships beween oil prices and economic growh raes, oil price shocks are found o Granger cause economic growh raes in Japan, Souh Korea and Thailand (in he las case, only when oil prices are defined in local currency) when several non-linear specificaions are used o model he relaionship beween he variables. Fourh, and as far as he inflaion raes are concerned, we find ha oil price shocks expressed in local currencies have a significan effec on inflaion in all analyzed counries. As before, he oil prices-consumer prices relaionship appears o be limied o he shor-run and more significan when oil price shocks are defined in local currencies. Fifh, we find evidence of asymmeries in he oil price changes-inflaion rae relaionship 17

19 for he cases of Japan, Thailand, Souh Korea and Malaysia, and only for he case of Souh Korea when he oil price changes-economic growh rae relaionship is analyzed. Furhermore, he oil prices-consumer prices relaionship appears o be more significan and more general han he oil prices-economic aciviy relaionship for he Asian counries. Finally, we find some differences among he responses of each of he Asian counries o oil price shocks. For example, he oil prices-macroeconomy relaionship seems o be less significan for he case of Malaysia (he only oil-imporing counry in he sample) han for he res of he economies. However, alhough he resuls seem o sugges ha he response of he oil-exporing counries may differ from ha of oil imporers, i is difficul o reach significan resuls from his sole resul and furher research is needed o obain a more reliable conclusion. Daa Appendix The quarerly daa used in his sudy are mainly obained from Inernaional Financial Saisics CDROM and cover he period 1975Q1-2002Q2. The counries included in he sudy are Japan, Singapore, Souh Korea, Malaysia, Thailand and Philippines. The variables are: - Real oil price levels: he world oil price is calculaed as he raio beween he producer price index for crude oil divided by he producer price index for all commodiies. The oil prices measured in naional currencies are obained using he exchange rae of each of he counries. These variables are deflaed using he consumer price index of each of he counries. - Exchange rae (e): e is he exchange rae for each Asian counry agains he $US; because oil price is expressed in $US i was convered o local currencies using he 18

20 average marke exchange raes for he quarer. - Inflaion raes: calculaed from Consumer Price Index (CPI), seasonally adjused. - Economic aciviy: proxied by Indusrial Producion Index for Japan and Souh Korea and Manufacuring Producion Index for Singapore, seasonally adjused. For he hree ASEAN-4 counries (Malaysia, Thailand and Philippines) we use he quarerly real GDP series consruced in Abeysinghe (2001). The firs hree series were available in seasonally adjused form and he ohers were seasonally adjused using X-12 procedure. 19

21 References Abeysinghe, T. (2001). Esimaion of direc and indirec impac of oil price on growh. Economic Leers 73, Brown, S.P.A., & Yücel, M.K. (2002). Energy prices and agregae economic aciviy: and inerpreaive survey. The Quaerly Review of Economic and Finance 42, Bruno, M., & Sachs, J. (1982). Inpu price shocks and he slowdown in economic growh: he case of U.K. manufacuring. Review of Economic Sudies 49, Burbidge, J., & A. Harrison. (1984). Tesing for he effecs of oil-price rises using vecor auoregression. Inernaional Economic Review 25, Caruh, A.A., Hooker, M.A., & Oswald, A.J. (1998). Unemploymen equilibria and inpu prices: heory and evidence from he Unied Saes. Review of Economics and Saisic 80, Davis, S.J. (1986). Allocaive disurbances and emporal asymmery in labor marke flucuaions. Universiy of Chicago, mimeo. Davis, S.J., & Haliwanger, J. (2001). Secoral job creaion and desrucion responses o oil price changes. Journal of Moneary Economics 48, Ferderer, J.P. (1996). Oil price volailiy and he Macroeconomy: A soluion o he asymmery puzzle. Journal of Macroeconomics 18, Gregory, A., & Hansen, B. (1996). Residual based ess for coinegraion in models wih regime shifs. Journal of Economerics 70, Hamilon, J. (1983). Oil and he macroeconomy since World War II. Journal of Poliical Economy 91, Hamilon, J. (1988). A neoclassical model of unemploymen and he business cycle. Journal of Poliical Economy 96,

22 Hamilon, J. (1996). This is wha happened o he oil price-macroeconomy relaionship. Journal of Moneary Economy 38, Hamilon, J. (2000). Wha is an oil shock?. NBER working paper Hooker, M. (1996) Wha happened o he oil price-macroeconomy relaionship?. Journal of Moneary Economics 38, Hooker, M. (1999). Oil and he macroeconomy revisied. Federal Reserve Board, mimeo. Hooker, M. (2002). Are oil shocks inflaionary? Asymeric and nonlinear specificaions versus change in regime. Journal of Money, Credi and Banking 34, Huningon, H. (1998). Crude oil prices and U.S. economic performance: Where does he asymmery reside?. Energy Journal 19, Huchison, M.M. (1993). Srucural change and he macroeconomic effecs of oil shocks: empirical evidence from he Unied Saes and Japan. Journal of Inernaional Money and Finance 12, Kahn, G., & Hampon, R. (1990). Possible moneary policy responses o he Iraqui oil shock. Federal Reserve Bank of Kansas Ciy Economic Review 2, Kim, I., & Loungani, P. (1992). The role of energy in real business cycle models. Journal of Moneary Economics 29, Lee, K., Ni, S., & Rai, R.A. (1995). Oil shocks and he macroeconomy: The role of price variabiliy. Energy Journal 16, Lee, B.R., Lee, K., & Rai, R.A. (2001). Moneary policy, oil price shocks and he Japanese economy. Japan and he World Economy 13, Lukepohl, H. (1982). Non-causaliy due o omied variables. Journal of Economerics 19,

23 McMillin, W. (1991). The velociy of M1 in he 1980s: Evidence from a mulivariae ime series model. Souhern Economic Journal 57, Mork, K. (1989). Oil and he macroeconomy when prices go up and down: An exension of Hamilon s resuls. Journal of Poliical Economy 97, Mork, K. (1994). Business cycles and he oil marke. Energy Journal 15, Mork, K., Olsen, O., & Mysen, H.T. (1994). Macroeconomic responses o oil price increases and decreases in seven OECD counries. Energy Journal 15, Phelps, E.S. (1994). Srucural Slumps. Cambridge: Harvard Universiy Press. Phillips, P.C.B., & Ouliaris, S. (1990). Asympoic properies of residual-based es for coinegraion. Economerica 58, Phillips, P.C.B., & Perron, P. (1988). Tesing for a uni roo in ime series regression. Biomerika, Rasche, R.H. & Taom, J.A. (1981). Energy price shocks, aggregae supply and moneary policy: The heory and Inernaional Evidence. Carnegie - Rocheser Conference Series on Public Policy 14, Takenaka, H. (1991). Conemporary Japanese Econmy and Economic Policy. Universiy of Michigan Press. Taom, J. (1988). Are he macroeconomic effecs of oil price changes symmeric?. Carnegie - Rocheser Conference Series on Public Policy 28, Zivo, E., & Andrews, D. (1992). Furher evidence on he grea crash, he oil-price shock, and he uni-roo hypohesis. Journal of Business and Economic Saisics 10,

24 Table 1 Correlaion coefficiens among real domesic oil prices and world oil prices Singapore Souh Korea Malaysia Thailand Philippines World Japan Singapore Souh Korea Malaysia Thailand Philippines 0.84 Noe: real domesic oil prices are defined as oil prices expressed in local currency and in real erms; world oil price is defined as he producer oil price index in real erms and expressed in $US. 23

25 Table 2 Correlaion coefficiens among oil price proxies oil + NOPI4 NOPI12 SOPI oil oil NOPI NOPI Noes: oil: real oil price changes, oil + : posiive real oil price changes, NOPI4: ne real oil price increase wih 4 quarers, NOPI12: ne real oil price increase wih 12 quarers, and SOPI: scaled real oil price increase. All hese proxies have been consruced using he oil price variable defined in $US. 24

26 Table 3 Uni roo ess: Phillips - Perron CPI Oil Prices Economic Aciviy (i) (ii) (iii) (i) (ii) (iii) (i) (ii) (iii) Japan ** Singapore S. Korea Malaysia Thailand Philippines World Noes: CPI is consumer price index; Oil Prices is defined as he real oil price expressed in local currency for each of he Asian counries excep for World oil price (expressed in $US); Economic Aciviy is proxied by Indusrial Producion Index in Japan and Souh Korea, Manufacuring Producion Index in Singapore, and quarerly real GDP in Malaysia, Thailand and Philippines. (i): wih no regressors; (ii): wih an inercep; (iii) wih an inercep and a linear ime rend. ** mean ha he uni roo es hypohesis is rejeced a 5%. In any of he cases we can rejec he null hypohesis of uni-roo, excep for he case of he CPI in Japan when an inercep is included in he model. However, based on he emporal evoluion of his series, is correlogram and he significaiviy of he ime rend in model (iii), we conclude ha his variable is beer characerized by an I(1) process. The same uni-roo ess have been applied o he firs differences of he variables (CPI, Oil Prices and Economic Aciviy) and in all cases we rejeced he null hypohesis of uniroo. The number of he lags included was deermined using Akaike Informaion Crieria (AIC). 25

27 Table 4 Coinegraion ess (world oil price) Phillips-Ouliaris # Gregory Hansen ## CPI Ec. Aciviy CPI Economic Aciviy (ii) (iii) (ii) (iii) (iv) (v) (iv) (v) Japan -4.74** (1986Q2) (1986Q3) (1986Q3) (1986Q3) Singapore (1986Q3) (1986Q2) (1992Q1) (1990Q4) S. Korea (1992Q2) (1990Q4) (1992Q2) (1992Q2) Malaysia (1992Q3) (1992Q3) (1992Q2) (1992Q3) Thailand (1992Q3) (1992Q3) (1990Q4) (1990Q4) Philippines (1992Q4) (1993Q2) (1993Q1) (1993Q2) Noes: CPI is consumer price index; Oil Prices is defined as he world oil price expressed in real erms and in $US; Economic Aciviy is proxied by Indusrial Producion Index in Japan and Souh Korea, Manufacuring Producion Index in Singapore, and quarerly real GDP in Malaysia, Thailand and Philippines. (ii): wih an inercep; (iii) wih an inercep and a linear ime rend. (iv): level shif model; (v): level shif wih rend model. The dae of he break in parenheses. # The criical values are aken from Phillips-Ouliaris (1990). ** mean ha he non coinegraion null hypohesis is rejeced a 5%. Again, and for he case of Japan, and based on he resuls of he uni roo ess in Table 3, he correlogram of he residuals of he long-run relaionship beween CPI and oil prices and he significaiviy of he ime rend in model (iii), we conclude ha here is no significan evidence o assume ha coinegraion exiss beween consumer and oil prices in Japan. ## The criical values are aken from Gregory and Hansen (1996). 26

28 Table 5 Coinegraion ess (local oil prices) Phillips-Ouliaris # Gregory Hansen ## CPI Ec. Aciviy CPI Economic Aciviy (ii) (iii) (ii) (iii) (iv) (v) (iv) (v) Japan (1990Q2) (1990Q4) (1982Q3) (1980Q2) Singapore (1978Q4) (1985Q3) (1992Q4) (1993Q3) S. Korea (1992Q3) (1990Q4) (1992Q2) (1992Q3) Malaysia (1996Q4) (1997Q3) (1992Q4) (1991Q4) Thailand (1996Q3) (1997Q2) (1990Q4) (1990Q4) Philippines (1997Q3) (1998Q1) (1993Q1) (1998Q1) Noes: CPI is consumer price index; Oil Prices is defined as he real oil price expressed in local currency for each of he Asian counries; Economic Aciviy (y) is proxied by Indusrial Producion Index in Japan and Souh Korea, Manufacuring Producion Index in Singapore, and quarerly real GDP in Malaysia, Thailand and Philippines. (ii): wih an inercep; (iii) wih an inercep and a linear ime rend. The dae of he break in parenheses.the dae of he break in parenheses. # The criical values are aken from Phillips-Ouliaris (1990). ## The criical values are aken Gregory and Hansen (1996). 27

29 Table 6 Granger causaliy ess from oil prices (expressed in $US) o economic growh raes oil oil + NOPI4 NOPI12 SOPI Japan * Singapore Souh Korea * Malaysia Thailand Philippines Noes: oil: real oil price changes; oil*ereal oil price changes expressed in local currency; oil + : posiive oil price changes; NOPI4: ne oil price increase wih 4 quarers; NOPI12: ne oil price increase wih 12 quarers; SOPI: scaled oil price increase; y is proxied by Indusrial Producion Index in Japan and Souh Korea, Manufacuring Producion Index in Singapore, and quarerly real GDP in Malaysia, Thailand and Philippines. The four oil price proxies have been defined using oil price variables expressed in $US. The number of he lags included was deermined according o he AIC crieria. The null hypohesis ha lag values of oil price shocks are no significan in explaining economic growh raes is esed (see equaion (7)). * indicaes significan a 10%. 28

30 Table 7 Granger causaliy ess from oil prices (in domesic currencies) o economic growh raes oil oil + NOPI4 NOPI12 SOPI Japan * * Singapore Souh Korea ** ** 6.84** Malaysia Thailand ** 0.25 Philippines Noes: oil: real oil price changes; oil*ereal oil price changes expressed in local currency; oil + : posiive oil price changes; NOPI4: ne oil price increase wih 4 quarers; NOPI12: ne oil price increase wih 12 quarers; SOPI: scaled oil price increase; Economic Aciviy is proxied by Indusrial Producion Index in Japan and Souh Korea, Manufacuring Producion Index in Singapore, and quarerly real GDP in Malaysia, Thailand and Philippines. Each of he oil price proxies have been defined using oil price variables expressed in local currencies. The number of lags have been chosen according o he AIC crieria. The null hypohesis ha lag values of oil price shocks are no significan in explaining economic growh raes is esed (see equaion (7)). * and ** indicae significan a 10 and 5% respecively. 29

31 Table 8 Granger causaliy ess from oil prices (expressed in $US) o inflaion oil oil + NOPI4 NOPI12 SOPI Japan 3.74** 4.09** 3.72** 3.57** 2.02* Singapore * * 1.35 Souh Korea Malaysia Thailand * 3.20** 3.68** 1.45 Philippines Noes: oil: oil price changes; oil*ereal oil price changes expressed in domesic currency; oil + : posiive oil price changes; NOPI4: ne oil price increase wih 4 quarers; NOPI12: ne oil price increase wih 12 quarers; SOPI: scaled oil price increase; inflaion is defined as he growh rae of CPI. The four oil price proxies have been defined using oil price variables expressed in $US. The number of lags have been chosen according o he AIC crieria. The null hypohesis ha lag values of oil price shocks are no significan in explaining changes in inflaion raes is esed (see equaion (8)). * and ** indicae significan a 10 and 5% respecively. 30

32 Table 9 Granger causaliy ess from oil prices (expressed in domesic currencies) o inflaion oil oil + NOPI4 NOPI12 SOPI Japan 5.12** 6.00** 5.01** 4.02** 8.00** Singapore 2.16* * 2.14* 2.63** Souh Korea 5.41** * 4.30** 1.50 Malaysia * ** 1.02 Thailand 3.23** 2.51* 3.18** 3.92** 3.87** Philippines 2.17* ** 2.37* Noes: oil: oil price changes; oil*ereal oil price changes expressed in domesic currency; oil + : posiive oil price changes; NOPI4: ne oil price increase wih 4 quarers; NOPI12: ne oil price increase wih 12 quarers; SOPI: scaled oil price increase; inflaion is defined as he growh rae of CPI. Each of he oil price proxies have been defined using oil price variables expressed in local currencies. The number of lags have been chosen according o he AIC crieria. The null hypohesis ha lag values of oil price shocks are no significan in explaining changes in inflaion raes is esed (see equaion (8)). * and ** indicae significan a 10 and 5% respecively. 31

33 Table 10 Tesing for asymmeric effecs of oil prices (expressed in $US) Inflaion rae (CPI) Economic growh rae (y) = 2 NOPI4-2 = 2 NOPI12-2 = = 2 NOPI4-2 = 2 NOPI12-2 = 2 Japan 7.54* Singapore Souh Korea ** 10.30** Malaysia ** Thailand 8.53* 8.30* 9.22* Philippines Noes: 2 + is he coefficien of oil + (posiive oil price increases) in equaions (9) and (10); 2 - is he coefficien of oil - (oil price decreases) in equaions (9) and (10); 2 NOPI4 is he coefficien of NOPI4 (ne oil price increases) in equaions (9) and (10); 2 NOPI12 is he coefficien of NOPI12 in equaions (9) and (10). The number of lags have been chosen according o he AIC crieria. The carry ou convenional Chi-square ess of he null hypohesis (12). * and ** indicae significan a 10 and 5% respecively. 32

34 Table 11 Tesing for asymmeric effecs of oil prices (expressed in domesic currencies) Inflaion rae (CPI) Economic growh rae (y) = 2 NOPI4-2 = 2 NOPI12-2 = = 2 NOPI4-2 = 2 NOPI12-2 = 2 Japan 7.89** Singapore Souh Korea * 10.42** 9.35** ** Malaysia ** Thailand 9.45** 7.98** 8.04** Philippines Noes: 2 is he coefficien of oil + - (posiive oil price increases) in equaions (9) and (10); 2 is he coefficien of oil - NOPI4 (oil price decreases) in equaions (9)and (10); 2 is he coefficien of NOPI4 (ne NOPI12 oil price increases) in equaions (9)and (10); 2 is he coefficien of NOPI12 in equaions (9) and (10). The number of lags have been chosen according o he AIC crieria. The carry ou convenional Chi-square ess of he null hypohesis (12). * and ** indicae significan a 10 and 5% respecively. 33

35 Figure 1 Real oil prices in local currencies and in dollars JAPAN SINGAPORE SOUTH KOREA MALAYSIA THAILAND PHILIPPINES Real oil prices for he Asian counries are defined as deflaced oil prices and expressed in local currency (solid lines). Real oil price in $US is defined as he raio beween he producer price index for crude oil divided by he producer price index for all commodiies (dashed line). 34

36 Figure 2 Alernaive measures of oil price shocks, 1975Q1-2002Q OIL PRICE CHANGES POSITIVE OIL PRICE CHANGES NOPI SOPI The firs figure represens he oil price changes (oil), he second one he posiive oil price changes (oil + ) and he las wo figures represen he evoluion of NOPI4 and SOPI variables calculaed as described in Secion 2. Alhough hese proxy variables have been calculaed in $US and in each of he local currencies, we only display he evoluion of he variables expressed in $US. 35