Oil prices and economic downturns: the case of Spain

ABSTRACT

We address the macroeconomic effects of an oil price shock in Spain. We apply a vector autoregression model (VAR) analysis to quarterly data for the Spanish economy since 1986, to elucidate the effects of variations in the oil price on the economy, considering the three main causes of disruptions in the oil markets: oil supply shocks, oil demand shocks and oil-specific (precautionary) demand shocks. We conclude that the effects in Spain strongly depend on the type of shock: the consumer price index (CPI) has mainly been influenced by oil demand shocks; output has only reacted to oil supply shocks; and monetary policy has mainly reacted after precautionary shocks. Second-round effects caused by the behaviour of nominal wages have not been found. Additionally, we discuss two facts: the ability of firms to increase markups in a context of rising demand and the procyclical role of monetary policy when faced with oil demand shocks.

KEYWORDS:

• Exogenous shocks
• oil price
• business cycle
• Spanish economy
• VAR

JEL CLASSIFICATION:

• C32
• C13
• Q43
• E00

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Although this variable is only a proxy, we consider that it is better than the one proposed by Kilian (2009) (oil cargo freight rates). It should be noted that, as we consider that oil demand shocks are driven by the world GDP, their effects could be deeply interrelated with those of some other world demand factors. That is, we may be attributing to this type of shocks, some other demand effects which are not strictly related with oil markets.

² All deterministic regressors have been suppressed in Equations (1) and (2) for notational convenience

³ The cumulative impulse–response functions are included in Appendix 2.

⁴ Guisán and Expósito (2013) show that the evolution of employment in non-agrarian sectors in Spain is related with the evolution of real value added of industry, as far as it has an impact on the real value added and employment in services. Taking this into account, it would be interesting, although out of our scope, to analyse whether an oil supply shock has a stronger impact on industrial value added than other type of shocks.