Response of macro variables of emerging and developed oil importers to oil price movements

Abstract

This paper assesses the impact of crude oil price movements on two macro variables, the gross domestic product (GDP) growth rate and consumer price index inflation rate, in the developed economies of the United States and Japan, and an emerging economy, the People's Republic of China (PRC). These countries were chosen for this research because they are the world's three largest oil consumers. The main objective of this study is to see whether these economies are still reactive to oil price movements. The results obtained suggest that the impact of oil price fluctuations on developed oil importers’ GDP growth is much lower than on the GDP growth of an emerging economy. The main reasons for this lie in fuel substitution (higher use of nuclear energy, gas, and renewables), a declining population (for Japan), the shale gas revolution (for the United States), and strategic oil stocks and government-mandated energy efficiency targets in developed economies. All of these factors make developed economies more resistant to oil shocks. On the other hand, the impact of oil price movements on the PRC's inflation rate was found to be milder than in the two developed countries that were examined. The main cause for this is that the PRC experiences a larger forward shift in its aggregate supply due to higher growth, which allows it to avoid a massive increase in price levels following oil price shocks.

Keywords:

• oil price fluctuations
• oil shocks
• emerging economies
• developed economies

JEL Classification:

• Q43
• E31
• O57

Acknowledgements

We are grateful to Mr. Masakazu Toyoda, the chairman and CEO of the Institute of Energy Economics of Japan (IEEJ), Tokyo, Japan, Dr. Ken Koyama, Mr. Yoshikazu Kobayashi, and the directors and researchers at IEEJ who kindly provided us with their valuable suggestions and comments to improve this paper. Last but not least, we would like to express our thanks to the anonymous referee and the editor of The Journal of the Asia Pacific Economy for their inestimable comments which helped us to prepare the current version of this article.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Equal to about 6186 million barrels of oil equivalent (Mboe).

2. http://www.eia.gov/beta/international/analysis_includes/countries_long/Japan/japan.pdf

3. Taghizadeh-Hesary and Yoshino (2014) used two monetary policy factors in their global crude oil model: real interest rate and the real effective exchange rate (REER). However, since in the second subperiod (August 2008–December 2013) the behavior of the Federal Reserve and other monetary authorities kept interest rates near zero, we added the money supply variable instead of the interest rate in our analysis.

4. For more information about exogeneity tests in structural systems with monetary application, please see Revankar and Yoshino (1990).

5. For the impact of money supply on the exchange rates, please see Yoshino, Kaji, and Asonuma (2012).

6. The original data were quarterly, but since our work file is on a monthly basis, we converted the data to monthly data and did exponential smoothing on the released data.

Additional information

Notes on contributors

Farhad Taghizadeh-Hesary

Farhad Taghizadeh-Hesary is an assistant professor of economics at the School of Economics, Keio University, Tokyo, Japan and a research assistant to the dean of the Asian Development Bank Institute (ADBI). He received the PhD degree in economics from Keio University. He was a visiting scholar at the Institute of Energy Economics of Japan (IEEJ) from 2013 to 2015.

Naoyuki Yoshino

Naoyuki Yoshino is the dean of the Asian Development Bank Institute (ADB Institute); professor emeritus of Keio University, in Tokyo, Japan; and a senior adviser at the Japan Financial Services Agency's (FSA) Financial Research Center (FSA Institute). He received the PhD degree in economics from Johns Hopkins University in 1979. He held several senior positions at the Government of Japan.

Majid Mohammadi Hossein Abadi

Majid Mohammadi Hossein Abadi received the PhD degree in management. He is the deputy for International Affairs, at the Institute for International Energy Studies, Ministry of Petroleum of the I.R. of IRAN.

Rosa Farboudmanesh

Rosa Farboudmanesh received the bachelor degree in economics and the master degree in business administration (MBA). Since 2009, she has been working at the Institute for International Energy Studies (IIES), Ministry of Petroleum of the I.R. of Iran.