Oil price changes and aggregate economic fluctuations: new evidence from the Republic of Korea

Joshua K. Park and Xiangcai Meng

Applied Economics, 2024, vol. 56, issue 5, 501-519

Abstract: The impact of oil price on the aggregate economy is an interesting topic which has been examined mainly in the time dimension, but relatively little exploration has been done to reveal how oil price influences inflation, industrial production, and unemployment across frequencies and over time. Employing a continuous wavelet approach, this study contributes to the literature by investigating the effects of oil price on aggregate economic activities in the time-frequency space with a monthly dataset from South Korea. The empirical results demonstrate that: First, the effect of oil price on inflation becomes stronger as moving from high frequencies between 2000 and 2005 to low frequencies between 2008 and 2018. Second, an increase in oil price is associated with a decrease in industrial production, and oil price movements could largely mirror industrial production fluctuations at the 64-month scale between 2011 and 2013 and at the 64-96-month scale between 2014 and 2021. Third, the impact of oil price on unemployment becomes weaker when moving from the 12-24-month scale between 2009 and 2012 to the 24-48-month scale between 2008 and 2016. Our results indicate that policymakers should consider these heterogeneous effects of oil price on the aggregate economy while developing stabilization policies.

Date: 2024
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DOI: 10.1080/00036846.2023.2168613

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