The Asymmetric Effects of Oil Shocks on an Oil-exporting Economy*

Transcription

1 CUADERNOS DE ECONOMÍA, VOL. 47 (MAYO), PP. 3-13, 2010 The Asymmeric Effecs of Oil Shocks on an Oil-exporing Economy* Omar Mendoza Cenral Bank of Venezuela David Vera Ken Sae Universiy We esimae he effecs of unexpeced changes in oil prices on oupu for he case of Venezuela, an oil-exporing economy. Following Hamilon (2003), Lee e al. (1995), and Mork (1989), we esimae measures of oil s and deermine he effec of hese s on he Venezuelan economy. Our resuls sugges ha oil s have had posiive and significan effecs on oupu growh in Venezuela during he period 1984:1 2008:3. In line wih previous findings for oher counries, our resuls sugges ha he Venezuelan economy is more responsive o increases in oil prices han o unexpeced decreases. Our resuls are robus o an alernaive measure of oil price s derived by using Kilian s (2009) exogenous OPEC oil producion series. JEL: C22, E32 Keywords: Oil Shocks, Oupu Flucuaions, Nonlinear Esimaion 1. Inroducion How indusrialized economies, mosly ne oil imporers, respond o oil s is well documened. For insance, oupu growh in he U.S. is more responsive o unexpeced increases in oil prices han o unexpeced decreases. This asymmeric resul is evidence of a nonlinear relaionship beween oil prices and oupu in he U.S. economy. However, lile research has been done o esablish how unexpeced changes in oil prices affec an oil-exporer economy, such as Venezuela. An imporan consideraion in deermining he effecs of oil s on he Venezuelan economy is he idenificaion of he exogenous componen in oil-price * Juan Pablo Monero and wo anonymous referees have provided very useful suggesions. The Cenral Bank of Venezuela Research Deparmen provided he daa used in his paper. All remaining errors are ours. dvera@ken.edu

2 Cuadernos de Economía Vol. 47 (Mayo) 2010 changes. In his paper, we explicily esimae a measure of oil s and deermine he oupu growh s response. Hamilon (2003) suggess measures of oil s for he U.S. economy. We esimae similar measures for he Venezuelan economy and deermine ha he adjused residual of a GARCH model of real oil prices seems o bes approximae oil s o he Venezuelan economy. We also deermine ha in 1984:1-2008:3 unexpeced changes in oil prices had on average a posiive and significan effec on oupu growh. Also, in line wih previous findings, our resuls sugges ha he Venezuelan economy is more responsive o unexpeced increases in oil prices han o decreases. In Secion 2, we discuss some of he mos relevan lieraure. Secion 3 describes he alernaive measures of oil s and he heoreical background. In Secion 4, we esimae he effec of oil s on he Venezuelan economy. Secion 5 discusses he robusness of our model. In Secion 6, we conclude and discuss possible exensions. 2. Relaed Lieraure Mos of he previous research on oil s and oupu has focused on he U.S. economy. In paricular, a significan number of aricles have poined o a nonlinear relaionship beween oupu and oil prices in he U.S. The nonlinear relaionship beween oupu and oil prices has had differen explanaions. For insance, Loungani (1986) and Davis (1987), who were he firs o repor evidence of nonlineariy, suggesed ha oil s may cause secoral shifs wih cosly reallocaion of resources. Mork (1989) found ha when esimaing separae coefficiens on increases and decreases of oil prices, he coefficien on decreases were saisically no differen from zero. Lee e al. (1995) found ha a beer forecas of GDP could be obained by adjusing he oil price increase by he sandard deviaion of price volailiy. Hamilon (2003) furher sudied he nonlineariy using a flexible parameric model and found suppor for he findings of Lee e al. (1995). More recenly, evidence of a nonlinear relaionship beween oupu and oil prices has also been repored for oher OECD counries in Mork (1989); Cuñado and de Gracia (2003); Jiménez-Rodríguez and Sánchez (2005). More recenly, anoher sring in he lieraure has been developed as an alernaive o he idenificaion of oil s used by Hamilon (2003) and Lee e al. (1995). Kilian (2008), Kilian (2009), and Kilian and Vigfusson (2009) poin o he poenial endogeneiy in he esimaion of he effecs of oil s on he U.S. economy and use a measure of oil s based on a srucural near-var model of he real price of crude oil. In Kilian (2009), he mehodology used in he idenificaion of srucural s o he real price of oil relies on delay resricions ha, according o he auhor, are economically plausible a only he monhly frequency. Kilian (2009) develops a mehodology ha allows he separaion of he innovaions on oil prices ino hree componens: oil supply s, aggregae demand s, and oil-specific demand s. By separaing he source of oil price s in hese hree componens, Kilian (2009) concludes ha mos of he

3 The Asymmeric Effecs of Oil Shocks on an Oil-exporing Economy 5 unexpeced flucuaions in oil prices are due o aggregae demand s and oilspecific demand s. We address he poenial endogeneiy of our measure of oil s by incorporaing he oil supply measure developed by Kilian (2009). Among he research on oil-exporing counries, Tazhibayeva e al.(2008) find ha oil s mainly affec he economic cycle in oil-exporing economies hrough heir own fiscal policy. By esimaing a VAR on a panel of oil exporing counries, he auhors are able o esimae fiscal impulses ha, in heir model, capure ransmission oil s o he economy. Differen from heir work, we look a only one counry, Venezuela, which Tazhibayeva e al. (2008) do no include in heir sample. In our research, which has a narrower scope, we are able o esimae counry-specific oil s, and deermine heir effec on he oil and nonoil secors of he economy. Baldini (2005) analyzes fiscal policy in Venezuela during In line wih our resuls, he auhor finds ha cyclical volailiy of he non-oil secor GDP is greaer han he volailiy of he oil secor GDP. Closer o our work, Arreaza e al. (2003) develop a small-scale macroeconomic model for Venezuela. Using heir model, esimaed for he period , he auhors conduc simulaion experimens o deermine he effec of differen s on inflaion, oupu, exchange raes and ineres raes. When looking a he effec of a in public expendiure, which could be due o an unexpeced increase in oil prices, he auhors find a posiive and significan, albei shor, effec on oupu. Alhough heir resuls are in line wih our findings, he auhors do no esimae oil s separaely and do no look a he possible asymmeric effec of oil s on oupu growh. 3. Alernaive Measures of Oil Shocks This secion describes he differen measures of oil s used in he lieraure. The mehodology developed by Hamilon (2003), Lee e al. (1995), and Mork (1989) focuses on he idenificaion of unexpeced changes o oil prices and heir effecs on he U.S. economy 1. Afer he esimaion of he oil s, an OLS regression is used o deermine he effec of he oil s on aggregae oupu. This mehodology has wo advanages. Firs, we inroduce only he exogenous componen of he change in he price of oil ino he OLS regression. Second, we inroduce he nonlineariy in he model by using a measure of oil s as a regressor. The following measures of oil s have been idenified in he exising lieraure. 1) Mork (1989): o o + = 0 if 0 o if o > 0, where o is he percenage change in he nominal price of oil. 1 Some exensions of hese models have been used o esimae he effec on OECD counries.

4 6 Cuadernos de Economía Vol. 47 (Mayo) ) Lee e al. (1995): o ± is a measure of adjused volailiy in he increases in he real price of oil 2. o ± = R o 0 if 0 h R R o o if > 0, h h where o R is he real price of oil; GARCH(1,1): h is esimaed from he following o = β + β o + β o + β o + β o + e R 0 1 R 1 2 R 2 3 R 3 R e = h v wih v N( 0, 1) h h = C + γe + mh The change in he real price of oil, o R = o ln p; o, is he percenage change in he nominal price of oil and ln p is he inflaion rae. 3) Hamilon (2003): Define o # as he amoun by which he nominal price of oil in quarer exceeds he highes value of he pas 12 quarers. If he nominal price of oil in quarer does no exceed he highes value of he pas 12 quarers, o # equals zero. Hamilon (2003) indicaes ha his accouns for he incremens ha represen correcions in he price of oil and no unexpeced s. 3.1 Benchmark model To measure he effec of oil s on aggregae oupu, Hamilon (2003) esimaes: (1) y = α + β y + δ o + ε 0 i i i= 1 i i i= 1 where o i can be any of he alernaive measures of s described in Secion 3 and y is he growh rae of real GDP. 2 We use he residuals of a regression where he dependen variable is he real price of oil.

5 The Asymmeric Effecs of Oil Shocks on an Oil-exporing Economy Which is he bes measure of s? Given he differen merics of oil s available, he following es can help deermine he bes measure of s. Hamilon (2003) indicaes ha even hough he measures of s are nonlinear funcions of oil prices, hey are linear funcions of he parameer esimaes of equaion (1). In fac, he benchmark model can be expressed as follows. (2) y = α + δ z + ε 0 Equaion (1) is a specific case of equaion (2), where z can be defined as [ y 1, y 2, y 3, y o o o, 1, 2, 3, o ]. In equaion (2), y -1 is he annualized quarerly growh rae of GDP in period -i and o i can be any of he alernaive measures of s described in Secion 3. The lineariy es proposed by Hamilon (2003) is based on he comparison of equaion (2): (3) y = α + δ z + λmx + ε 0 where x = [ o 1, o 2, o 3, o ], o -i is he change in oil prices in period -i and m is he value of he random field described by Hamilon (2003, p. 14). The inuiion behind his is ha by esing a null hypohesis λ=0, we can deermine if z adequaely capures he nonlinear relaionship beween y and o -j. Hamilon s (2003) resuls yield he measure proposed by Lee e al., (o ± ), as he mos appropriae nonlinear esimae of oil s effec on aggregae oupu. 4. Resuls According o he Energy Informaion Adminisraion: Venezuela is one of he world s larges exporers of crude oil and he larges in he Wesern Hemisphere. In 2006, he counry was he sixh-larges ne oil exporer in he world. The oil secor is of cenral imporance o he Venezuelan economy: i accouns for more han hree-quarers of oal Venezuelan expor revenues, abou half of oal governmen revenues, and around one-hird of oal gross domesic produc (GDP). Following, Sock and Wason (2002) we calculaed he volailiy of oil prices, shown in Figure 1. The figure illusraes large swings in volailiy during he sample period.

6 8 Cuadernos de Economía Vol. 47 (Mayo) 2010 FIGURE 1 OIL-PRICE VOLATILITY Source: BCV (Banco Cenral de Venezuela), auhors calculaion. 4.1 Oil s effecs on he Venezuelan Economy To esimae he measure of oil s, we recall ha our measure of s should capure he unexpeced swings in oil prices. We were able o calculae a measure similar o he one proposed by Lee e al. (1995). We use he real price of oil as a saring variable and esimae he following model 3. (4) o = β + β o + β o + β o + β o + e v 0 1 v 1 2 v 2 3 v 3 v where o v is he real price of Venezuela oil and GARCH(1,1): h is esimaed hrough a (5) e = h v v N( 0, 1) h (6) h = C + γe + m h. 3 We obained similar resuls when he nominal price of oil was used.

7 The Asymmeric Effecs of Oil Shocks on an Oil-exporing Economy 9 = The oil- measure can be defined as o, he normalized h residual of equaion (4). Figure 2 shows he Wes Texas Inermediae (WTI) in US$, he reference value used by he Venezuelan governmen o esimae oil revenues, as well as a measure of oil s. Oil prices have been erraic during he sample period, experiencing a significan run up since 2002, which led o a hisoric high in he summer of e FIGURE 2 OIL-PRICE AND OIL SHOCKS Source: BCV. We examine quarerly growh of real oal GDP, real oil-secor GDP, and real nonoil-secor GDP for he period 1984:2 o 2008:3. When we inroduced our measure of oil s ino equaion (1), we obained he following resuls for oal GDP. (7) y = y y y y ( 0. 77) ( ) ( ) ( 0.101) ( ) o o o o ( ) ( 0. 59) ( ) ( 0. 77) + The effec of oils s is posiive and significan. The p-value of he es on he oil- coefficien being zero is Given he imporance of oil in he Venezuelan economy, he Cenral Bank of Venezuela esimaes GDP for he oil and nonoil secors separaely. Our resuls are also robus o yearly growh rae.

8 10 Cuadernos de Economía Vol. 47 (Mayo) 2010 When we look a oil GDP, we obain he following resuls: oil oil oil oil oil y y ( ) ( 0. 10) ( ) ( ) ( ) (8) y = y y o ( ) 1 o 2 o 3 ( ) ( ) o ( ) The p-value of he es on he oil- coefficien being zero is For nonoil GDP, noil noil noil noil noil y y ( ) ( ) ( ) ( ) ( ) (9) y = y y ( 0. 13) 1 ( 0. 16) 2 ( ) o o o o ( ) The effecs of oil s are posiive and significan. The p-value associaed wih oil s is Ineresingly he effec of oil s is always significan. However, he effec is more subsanial on he nonoil GDP han on he oil GDP. This resul is driven by he fac ha he oil revenues generaed by he sale of Venezuelan oil by a sae-owned company go back ino he economy hrough public spending. On he oher hand, oil GDP is deermined by he amoun of oil he governmen decides o produce, which may be unrelaed o curren marke condiions. 4.2 Nonlinear effec of oil s in he Venezuelan Economy Nex, we look a he effec of unexpeced oil-price increases, which has been he sandard definiion of oil s for oil-imporer economies. In order o shed ligh on his issue, we redefine an oil as: o -pos if o = 0 0 o if o > 0, where o is he normalized residual of Model (4). We inroduce he measure of s, o -pos, ino he models for oal GDP, oil GDP, and nonoil GDP. In he case of oal GDP, (10) y = y y y y ( ) ( ) ( ) ( 0.10) ( ) -pos -pos -pos 0. 25o o o ( ) ( ) ( ) (. 238) o -pos. The overall es of significance on o -pos i for i=1, 2, 3 and 4, yields a coefficien of wih a p-value of 0.07.

9 The Asymmeric Effecs of Oil Shocks on an Oil-exporing Economy 11 In he case of he oil GDP, he coefficien on he unexpeced posiive increases in oil prices is also posiive bu wih a greaer p-value, In he case of he nonoil GDP, he coefficien is also posiive and he p-value on he es of overall significance is Robusness An imporan assumpion in our measure of is ha i clearly capures he exogenous unexpeced changes in oil price. The issue of endogeneiy for he case of he U.S. has been sudied by Kilian (2009). Given he size of he U.S. economy, i is imporan o differeniae unexpeced changes in oil prices due o changes in he demand of oil from changes in oil prices due o changes in supply of oil. Kilian s (2009) findings indicae ha mos of he real oil-price increases since he mid-1970s are due o increases in he demand for oil. Furhermore, he mos recen increases in he price of oil can be raced o global aggregae demand s. However, here may be concerns ha, even in our case, he assumpion of endogeneiy may be oo srong. In paricular, a imes when he Venezuelan oil producion was dramaically cu, oil prices responded o his supply. For example, Kilian (2008) noes ha he oil indusry srike of December 2002 in Venezuela led o a drop in producion of 2.3 million barrels a day, or 3.4% of world producion a he ime. The measure of oil s developed by Hamilon (2003), o #, refleced an increase in crude oil prices 20% above he previous 3-year high. In order o verify ha our resuls are robus o poenial endogeneiy, we use an alernaive approach o clean oil-price flucuaions from changes in oil prices due o s on he supply of oil. Kilian (2009) develops a mehodology ha separaes he innovaions on oil prices ino hree componens: oil supply s, aggregae demand s, and oil-specific demand s. By separaing he source of oil-price s in hese hree componens, Kilian (2009) concludes ha mos of he unexpeced flucuaions in oil prices are due o aggregae demand s and oil-specific demand s. In principle, our measure of oil s derived in Secion 4.1 would include all hree differen ypes of innovaions. One way o conrol for he oil-supply s would be o regress our Venezuela real oil-price series on a measure of oil supply s. Theoreically, he residual on his regression should include global aggregae demand s and oil-specific demand s, which are exogenous o he Venezuelan oil price. As an alernaive o he oil s defined in Secion 4, we esimae he following regression. v supply- supply- supply- supply λ o + e, (11) o = λ + λ o + λ o + λ o where, o supply- is he series of exogenous oil-supply s from Kilian (2009) 5. 5 Kilian (2008) provides a series on exogenous OPEC oil-producion s, including he Venezuelan oil indusry srike during he period This series is available a URL: hp://www-personal.umich.edu/~lkilian/oil.x.

10 12 Cuadernos de Economía Vol. 47 (Mayo) 2010 This alernaive oil-price, o Kilian, can be defined as he residual of equaion 11. Figure 3 shows he wo oil- series: o s (oil-price (1)), esimaed earlier, and o Kilian (oil-price (2)). As expeced, a imes of oil-supply disrupion (grey shaded area) oil-price (2), which heoreically only includes aggregae demand s and oil-specific demand s, is sysemaically lower han oil-price (1). In he case of Venezuela, i is imporan o separae he source of he unexpeced change in oil price. For insance, during he oil indusry srike in Venezuela in 2002, as expeced, oil-price (1) is higher han oilprice (2). In order o check he robusness of our resuls from Secion 4, we proceed o esimae he effec of our new measure of oil s, o Kilian, on real GDP for he period 1984:2-2004:3. 6 Our resuls are robus o his alernaive measure of oil s. When we re-esimae equaion (1), we find ha he effec of oil s, o Kilian, is posiive and significan. The p-value associaed wih o Kilian is I is imporan o emphasize ha hese resuls can be considered a lower bound since our measure of oil s, o Kilian, is cleaned of all oil-supply s. Ideally, we would like o have a measure of oil s ha is orhogonal only o he Venezuelan oil-supply s. FIGURE 3 ALTERNATIVE OIL SHOCKS Source: auhors calculaion. 6 Our oil price measure, o Kilian, can only be esimaed unil 2004:3 since Kilian s (2009) measure of oil-supply s is only available unil 2004:3

11 The Asymmeric Effecs of Oil Shocks on an Oil-exporing Economy Conclusion We deermine ha oil s, measured as unexpeced changes in oil prices, have had a posiive and significan effec on he Venezuelan economy. We also find ha he unexpeced increases in oil prices have had a greaer effec on oupu han he unexpeced decreases had. In line wih previous findings in he lieraure, (Hamilon, 2003) we also find ha in he case of an oil exporer, oil s have asymmeric effecs on oupu growh. However, as expeced, he effec of unexpeced increases in oil prices is posiive and significan. Our resuls are also robus o a measure of oil s ha considers price disrupions due o exogenous oil-supply s driven by OPEC poliical evens (Kilian, 2009). References Arreaza, A., E. Blanco, and M. Dora (2003), A Small Scale Macroeconomic Model for Venezuela. Series de Documeno de Trabajo 43, Banco Cenral de Venezuela. Baldini, A. (2005), Fiscal Policy and Business Cycles in an Oil-Producing Economy: The Case of Venezuela. IMF Working Papers 05/237, Inernaional Moneary Fund. Cuñado, J. and F.P. de Gracia (2003), Do Oil Price Shocks Maer? Evidence for some European Counries. Energy Economics, 25(2): Davis, S.J. (1987), Allocaive Disurbances and Specific Capial in Real Business Cycle Theories. American Economic Review, 77(2): Hamilon, J.D. (2003), Wha is an Oil Shock?. Journal of Economerics, 113: Jiménez-Rodríguez, R. and M. Sánchez (2005), Oil Price Shocks and Real GDP Growh: Empirical Evidence for Some OECD Counries. Applied Economics, 32(2): Kilian, L. (2008), Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Maer for he U.S. Economy? The Review of Economics and Saisics, 90(2): Kilian, L. (2009), No All Oil Price Shocks Are Alike: Disenangling Demand and Supply Shocks in he Crude Oil Marke. American Economic Review, 99(3): Kilian, L. and R.J. Vigfusson (2009), Pifalls in Esimaing Asymmeric Effecs of Energy Price Shocks. Inernaional Finance Discussion Papers 970, Board of Governors of he Federal Reserve Sysem (U.S.). Lee, K., N. Shawn, and R. Rai (1995), Oil Shocks and he Macroeconomy: The Role of Price Variabiliy. Energy Journal, 16: Loungani, P. (1986), Oil Price Shocks and he Dispersion Hypohesis. The Review of Economics and Saisics, 68(3): Mork, K.A. (1989), Oil and he Macroeconomy when Prices Go Up and Down: An Exension of Hamilon s Resuls. Journal of Poliical Economy, 97: Sock, J. H. and M.W. Wason (2002), Has he Business Cycle Changed and Why? NBER Working Papers 9127, Naional Bureau of Economic Research, Inc.10 Tazhibayeva, K., A.Ter-Marirosyan, and A.M. Husain (2008), Fiscal Policy and Economic Cycles in Oil-Exporing Counries. IMF Working Papers 08/253, Inernaional Moneary Fund.