Oil Prices and the US Macroeconomy

An economy’s long-run growth and development critically depend on its resilience and susceptibility to shocks (Balassa, 1986; Martin, 2012; Romer and Romer, 2004). Energy shocks have been placed in the centre of this observation, since growth-inducing activities are highly dependent on access to energy. For the past several decades, heavy global dependence on non-renewable energy sources has been considered a significant threat to sustainable economic growth.

Hamilton (1983) observed in post-World War II data that about 90% of US recessions were preceded by drastic increases in oil prices, which made the oil price-macroeconomy relationship a central focus of research for decades. Recent political turmoil in the Middle East as well as the desire to control carbon emissions and to incorporate more renewables into the energy mix have increased attention to the topic once again.

This paper is motivated by four controversial questions within the oil price-macroeconomy theme:

1. Does the choice of oil price measure matter for empirical results?

2. Do different sample periods lead to different empirical results or is the relationship stable over time?

3. Is there asymmetry in the oil price-macroeconomy relationship?

4. Does volatility of oil prices immediately preceding a shock affect estimated parameters and, ultimately, the outcome?

Oil Prices and the UK Macroeconomy

Following the structure and aims of the paper above, this study focuses on the UK economy with a few key differences between the US and UK economies.

In particular, I investigate whether the UK's changing importer and exporter status influences the relationship in a meaningful way. As part of this, I analyse the impact of oil price fluctuations and volatility on unemployment, inflation, and other macroeconomic fundamentals in addition to GDP growth.

Oil Rents and the Real Exchange Rate

This study investigates whether oil rents and oil-exporting countries' real exchange rates are linked. Empirical modelling exploits the large-N, large-T nature of the dataset with a focus on the Balassa-Samuelson effect. We find that the B-S mechanism holds in some oil-exporting countries but not all. For most countries, the relationship is non-negligible in size and precisely estimated. The effect is more pronounced in countries with large oil sectors, but the findings are ambiguous for OPEC countries.