Oil prices and the world business cycle: A causal investigation

José Tapia Granados ()

MPRA Paper from University Library of Munich, Germany

Abstract: Oil shocks have been often considered as exogenous factors responsible of economic downturns. In this paper the hypothesized exogeneity of oil prices is investigated by using running cross-correlations, distributed lag-regressions, Granger causality tests and VAR models applied to annual data 1960-2014 of oil prices and global economic activity—as measured by world GDP. Strong evidence is found that (a) the relation between oil prices and the global economy has significantly changed since the 1960s to the present, and (b) oil prices are endogenously influenced by the level of activity in the global economy. Evidence of a negative effect of oil prices on the global economy is weak for the whole sample and null for recent decades. These findings are consistent with former results using the Kilian index, which is shown to be a leading indicator of activity in the world economy. As such it is significantly correlated with other indicators of the global business cycle, such as the rate of growth of world output and the annual growth of CO2 global emissions.

Keywords: oil price; global economy; business cycle (search for similar items in EconPapers)
JEL-codes: E32 F00 F2 (search for similar items in EconPapers)
Date: 2016-01-19
New Economics Papers: this item is included in nep-ene and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:68978

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