All time cheaters versus cheaters in distress: An examination of cheating and oil prices in OPEC

This paper investigates the OPEC quota share system and whether there is any pattern to “cheating”. Using threshold cointegration methods, we examine each OPEC member's cheating behavior in periods of rising and falling real oil prices. Most OPEC members behave differently in response to rising oil prices than falling oil prices. For shocks of typical historical size, most members overproduce their quotas regardless of the direction of the real oil prices in the medium to long run. However, in response to large real oil price shocks, most members conform to a “public finance argument” whereby they underproduce their quotas in response to rising oil prices and overproduce in response to falling real oil prices. In an extended model with cheating by Saudi Arabia and other OPEC members, we find no statistically significant relationship between Saudi Arabian cheating and other cheating. The impulse response functions reveal that for typical shocks, neither Saudi Arabia nor other OPEC members absorb cheating by the other party. However, when there is a large incidence of cheating by other OPEC members, Saudi Arabia responds in kind: this forceful response is in line with a tit-for-tat strategy when there is “too much” cheating.     

The shale oil revolution and the global oil supply curve

We focus on the implications of the shale oil boom for the global supply of oil. In order to derive testable implications, we introduce a simple stylized model with two producers, one facing low production costs and one higher production costs but potentially lower adjustment costs, competing à la Stackelberg. We find that the supply function is flatter for the high cost producer and that the supply function for shale oil producers becomes more responsive to demand shocks when adjustment costs decline. On the empirical side, we apply an instrumental variable approach using estimates of demand-driven oil price changes derived from a standard structural VAR of the oil market. A main finding is that global oil supply is rather vertical, with a short-term elasticity around 0.05. A rolling sample reveals that the shale oil boom does not appear to have fundamentally changed the contours of global oil production, but there is evidence for the oil supply curve to become more vertical in Saudi Arabia and more price responsive in the United States.     

Nonlinear adjustment,purchasing power parity and the role of nominal exchange rates and prices

Although the literature on purchasing power parity (PPP) is rich in controversy, the relative contribution of prices and nominal exchange rates to real exchange rate movements which restore PPP disequilibria has rarely been put under any close scrutiny. This paper as a first step applies a cointegrated VAR framework to test for stationary real exchange rates and linear adjustments in prices and nominal exchange rates. As a second step, ESTR error correction models are fitted to test whether nonlinear error correctional behaviour characterizes the data. The results clearly indicate that the nominal exchange rate is responsible for the nonlinear mean reverting behaviour in real exchange rates and also mainly drives overall adjustment. Applying dynamic stochastic simulations based on the estimated models, this study also confirms recent results that the half-life times of real exchange rate shocks are significantly smaller than the consensus benchmark of 3–5 years.     

What Drives Oil Prices? Emerging Versus Developed Economies

We explore the role of demand from emerging and developed economies as drivers of the real price of oil. Using a FAVAR model that identifies shocks from different regions of the world, we find that demand from emerging economies (most notably from Asian countries) is more than twice as important as demand from developed countries in accounting for the fluctuations in the real oil price and in oil production. Furthermore, geographical regions respond differently to adverse oil market shocks that drive up oil prices, with Europe and North America being more negatively affected than countries in Asia and South America. Copyright © 2014 John Wiley & Sons, Ltd.     

Real exchange rate misalignment: Prelude to crisis?

A model of the long-run equilibrium real exchange rate based upon macroeconomic fundamentals is employed to calculate real exchange rate misalignments for Poland and Russia during the 1990s using the Beveridge and Nelson (Beveridge, S., Nelson, C., 1981. A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle. J. Monetary Econ. 7, 151–74) decomposition of macrofundamentals into transitory and permanent components. Short-run movements of the real exchange rate are estimated with ARIMA and GARCH error correction specifications. The different nominal exchange rate regimes of the two countries generate different levels of misalignment and different responses to exogenous shocks. The average misalignment in Russia is substantially greater than that in Poland, indicating incipient pressures to devalue the ruble immediately preceding the August 1998 crisis. The half-life of an exogenous shock is found to be much shorter for Poland than for Russia in the pre-crisis period. Dynamic forecasts indicate that the movements of the real exchange rate in the post-crisis period are significantly different from those in the pre-crisis period. Thus, the currency crisis in Russia could not be anticipated with the movements of the real exchange rate estimated with the macroeconomic fundamentals.     

The time varying effect of oil price shocks on euro-area exports

In this paper we provide novel evidence on changes in the relationship between the real price of oil and real exports in the euro area. By combining robust predictions on the sign of the impulse responses obtained from a theoretical model with restrictions on the slope of the oil demand and oil supply curves, we identify oil supply and foreign productivity shocks in a time varying VAR with stochastic volatility. We find that from the 1980s onwards the relationship between oil prices and euro area exports has become less negative conditional on oil supply shortfalls and more positive conditional on foreign productivity shocks. Using the theoretical model we show that our empirical findings can be accounted for by (i) stronger trade relationship between the euro area and emerging economies (ii) a decrease in the share of oil in production and (iii) increased competitive pressures in the product market.     

A Model of Optimal Dynamic Oil Extraction: Evidence From a Large Middle Eastern Field

We model the economically optimal dynamicoil production decisions of a representative country whose oilfields resemble the largest developed oil field in Saudi Arabia,Ghawar. A government-controlled enterprise may base its oil productiondecisions on criteria other than maximization of the presentdiscounted value of profits. In particular, oil production decisionsare likely to reflect many political, strategic and geopoliticalmotives of the government. Our analysis of the optimal economicdecisions nevertheless enables one to assess the extent to whichlong-run value maximization is being followed. This in turn allowsone to judge the costs that political decisions are imposingin terms of foregone economic output, government revenue andforeign exchange. These costs ought to be of interest to policy-makerswithin Saudi-Arabia and also to external parties interested inmodifying Saudi pricing and production decisions.     

Evaluating New‐Keynesian Models of a Small Open Economy*

We suggest a strategy to evaluate members of a class of New‐Keynesian models of a small open economy. As an example, we estimate a modified version of the model in Svensson [Journal of International Economics (2000) Vol. 50, pp. 155–183] and compare its impulse response and variance decomposition functions with those a structural vector autoregression (VAR) model. The focus is on responses to foreign rather than to domestic shocks, which facilitates identification. Some results are that US shocks account for large shares of the variance of Canadian variables, that little of this influence is due to real exchange rate movements, and that Canadian monetary policy is not adequately described by a Taylor rule.     

Sources of asymmetric shocks: The exchange rate or other culprits?

We analyze and quantify the determinants of medium-term real exchange rate (RER) changes. First, we discuss the sources of asymmetric shocks causing exchange rate variability and the role of the RER as a shock absorber or generator. Secondly, we use data for 21 advanced and late transition economies to gauge the extent to which medium-term bilateral real exchange rate variability can be explained by various fundamental factors. Using Bayesian model averaging, we find that out of 22 factors under consideration, four types of dissimilarities within a given pair of economies are likely to be included in the true model: dissimilarities as regards (i) financial development, (ii) per capita income growth, (iii) central bank autonomy, and (iv) the structure of the economy. A regression based on these four factors indicates that they explain about 96 percent of the sample average level of three year RER variability. In the logic of our approach, the remaining part of the total variability represents an upper estimate of the influence of the foreign exchange market itself. For our sample, the contribution of the real exchange rate itself to asymmetric shocks therefore appears to be very low.     

TIME‐VARYING DYNAMICS OF THE REAL EXCHANGE RATE: AN EMPIRICAL ANALYSIS

We use a time‐varying structural vector autoregression to investigate evolving dynamics of the real exchange rate for the UK, euro area and Canada. We show that demand and nominal shocks have a substantially larger impact on the real exchange rate after the mid 1980s. Real exchange rate volatility, relative to fundamentals, also shows a marked increase after this point in time. However, there is some evidence suggesting a closer business cycle co‐movement of the real exchange rate and fundamentals. Simulations from an open‐economy DSGE model show that these results are consistent with a decline in exchange rate pass‐through. Copyright © 2012 John Wiley & Sons, Ltd.     

Real exchange rate,stationarity, and economic fundamentals

Using monthly data for the US/UK real exchange rate over the period 1921–2002, we find evidence that the mean reverting tendency of the real exchange rate is stochastic, and regime-dependent. There is one regime over which PPP holds as a long-run equilibrium relation, i.e. a stationary PPP regime, and another regime over which PPP does not hold, i.e. a non-stationary PPP regime. The transition from the non-stationary to the stationary regime is found to be affected by the real interest rate differential, and by the volatility of the nominal exchange rate. The real output differential does not appear to affect the transition probability.     

The time series characteristics of quarterly nominal and real lira/pound-sterling exchange rate movements, 1973–1988

Time series analysis is applied to quarterly data on nominal and real, lira/pound-sterling exchange rates for the period 1973 Q1 to 1988 Q2. The paper uses logarithmic values which are examined using both time and frequency domain techniques. Trends and cyclical characteristics are examined and related to the concept of purchasing power parity. Furthermore, the validity of the random walk model is considered, as well as the distribution of exchange rate movements. The results suggest that the nominal exchange rate follows a quasi-random walk with drift, whereas real exchange rates show a quasi-random walk without drift. There exists, however, evidence of a non-stationary mean. The frequency domain techniques do not clearly show that cyclical characteristics are a feature of exchange rate movements. The distribution of these movements shows approximate normality.     

The exchange rate system and macroeconomic fluctuations in Sub-Saharan Africa

In this paper, we investigate the sources of macroeconomic fluctuations in Sub-Saharan African (SSA) countries with particular attention to the exchange rate system. We use a structural Vector Autoregression (VAR) model with limited capital mobility and long run restrictions to identify the shocks. Supply and terms of trade shocks tend to dominate output movements in the CFA and non-CFA countries alike. However, terms of trade shocks tend to influence the CFA zone to a greater extent and there seems to be a higher influence of demand shocks on output and the real exchange rates in the non-CFA countries.     

Investigating properties of commodity price responses to real and nominal shocks

This paper studies dynamic adjustments of 49 world commodity prices in response to innovations in the nominal exchange rate and the world real GDP. After we estimate the dynamic elasticity of the prices with respect to these shocks, we obtain the kernel density of our estimates to establish stylized facts on the adjustment process of the commodity price toward a new equilibrium path. Our empirical findings imply, on average, that the law of one price holds in the long-run, whereas the substantial degree of short-run price rigidity was observed in response to the nominal exchange rate shock. The real GDP shock tends to generate substantial price fluctuations in the short-run because adjustments of the supply can be limited, but have much weaker effects in the long-run as the supply eventually counterbalances the increase in the demand. Overall, we report persistent long-lasting effects of the nominal exchange rate shock on commodity prices relative to those of the real GDP shock.     

Oil prices,stock returns,and exchange rates: Empirical evidence from China and the United States

Employing the diagonal BEKK model as well as the dynamic impulse response functions, this study investigates the time-varying trilateral relationships among real oil prices, exchange rate changes, and stock market returns in China and the U.S. from February 1991 to December 2015. We highlight several key observations: (i) oil prices respond positively and significantly to aggregate demand shocks; (ii) positive oil supply shocks adversely and significantly affect the Chinese stock market; (iii) oil price shocks persistently and significantly impact the trade-weighted US dollar index negatively; (iv) the US and China stock markets correlate positively just as the dollar index and the exchange rate does; (v) a significant parallel inverse relation exists between the US stock market and the dollar and between the China stock market and the exchange rate; and (vi) the Chinese stock market is more volatile and responsive to aggregate demand and oil price shocks than the US stock market in recent years.     

The exchange value of the dollar and the U.S. trade balance: An empirical investigation based on cointegradon and Granger causality tests

This article performs tests of Granger causality in the relationships between the nominal ad real exchange rates of the dollar and the U.S. trade balance as well as its price and quantity components over the period 1973:IIQ–1989:IIIQ. Our results suggest: (i) weak statistical evidence of unidirectional causality running from the nominal exchange rate to import prices and nominal trade balance (ii) no statistical support for the proposition that the real exchange rate simply “accommodates” changes in the real trade balance, and (iii) strong (no) causal links between the nominal and real exchange rates and export (import) volume. We tentatively conclude that movements in the exchange rate have a rather limited effect on the trade balance and that this effect is more likely to materialize on the export side of the trade balance.     

Oil Prices and Personal Consumption Expenditures: Does the Source of the Shock Matter?

This paper studies the effect of structural oil shocks on personal consumption expenditures (PCE). First, we estimate a nonlinear simultaneous equation model, compute impulse responses by Monte Carlo integration, and conduct a test of the symmetry of the impulse response functions. We find that aggregate PCE responds asymmetrically to positive and negative oil‐specific demand shocks. Second, we find that aggregate PCE responds negatively to positive oil demand shocks, while adverse oil supply shocks are of limited effect. Third, we find important heterogeneity in the magnitude, sign and timing of the disaggregate PCE responses to structural shocks in the crude oil market. Our results clearly indicate that the response of PCE to an unexpected oil price increase depends on the source of the oil price shock. Our findings are robust to different nonlinear transformations for the real price of oil.     

R&D and aggregate fluctuations

Empirical observations raise interesting questions regarding the sources of the excessive volatility in the R&D sector as well as the nature of the relation between the sector and aggregate fluctuations. Using US data for the period 1959–2007, we identify sectoral technology and capital investment-specific shocks by employing a Vector Autoregression. The identifying assumptions are motivated by a two-sector dynamic general equilibrium model. Controlling for real and nominal factors, we find that capital investment-specific shocks explain 70 percent of fluctuations of R&D investment, while R&D technology shocks explain 30 percent of the variation of aggregate output, net of R&D investment. Technology shocks jointly explain almost all the variation of output in the R&D sector and 78 percent of the variation of output in the rest of the economy. They also constitute the main factor of the procyclicality of R&D investment.     

Oil price shocks and unemployment in Central and Eastern Europe

The aim of this paper is to examine the effect of oil price movements on unemployment in Central and Eastern Europe. We do this by disentangling oil prices movements by their sign and from there we analyse the separate effects of positive and negative movements of oil prices on unemployment rates. We find that, although oil prices and unemployment are not correlated very much in the short run, the effect of oil price shocks on the natural rate of unemployment goes in the same direction, so that increases or decreases in oil prices increase or decrease the natural rate of unemployment.     

Exchange Rates and Prices: Sources of Sterling Real Exchange Rate Fluctuations 1973–94

We attempt to identify the sources of UK exchange rate and relative consumer price fluctuations by applying the Clarida and Gali (1994) extension of the Blanchard and Quah (1989) structural VAR method to UK data. We (r)nd that IS shocks underlay the majority of the variance of sterling real and nominal exchange rates. Aggregate supply (AS) shocks were the second most important source of such variations, while LM shocks played an extremely limited role. In contrast, the variance of UK relative consumer prices primarily reflected LM shocks.