Business Cycles in an Oil Economy: Lessons from Norway

Abstract

The recent oil price fall has created concern among policy makers regarding the consequences of terms of trade shocks for resource-rich countries. This concern is not a minor one-the world's commodity exporters combined are responsible for 15-20% of global value added. We estimate a two-country New Keynesian model in order to quantify the importance of oil price shocks for Norway-a large, prototype petroleum exporter. Domestic supply chains link mainland (non-oil) Norway to the offshore oil industry, while fiscal authorities accumulate income in a sovereign wealth fund. Oil prices and the international business cycle are jointly determined abroad. These features allow us to disentangle the structural sources of oil price fluctuations, and how they affect mainland Norway. The estimated model provides three important results: First, pass-through from oil prices to the oil exporter implies up to 20% higher business cycle volatility. Second, the majority of spillover effects stem from non-oil disturbances such as innovations in international investment efficiency. Conventional oil market shocks, in contrast, explain at most 10% of the Norwegian business cycle. Third, the prevailing fiscal regime provides substantial protection against external shocks while domestic supply linkages make the oil exporter more exposed. * This working paper should not be reported as representing the views of Norges Bank. The views expressed are those of the authors and do not necessarily reflect those of Norges Bank. We would like to thank Martín Uribe, Jordi Galí and Lars E. O. Svensson for helpful comments and discussions. We are also grateful for valuable input by discussants and participants in seminars and workshops hosted by the Bank for International Settlements, Deutsche Bundesbank, Banque de France, and Norges Bank. This work is part of the Norges Bank project Review of Flexible Inflation Targeting (ReFIT).

Revisiting the commodity curse: A financial perspective

“…While we share the same insight in terms of the role of …nancial openness and its long-run implication, our three-sector economy allows us to study how the evolution of relative comparative advantage between the traded and the commodity sectors interact with the structure of international …nancial market and the presence of dynamic productivity gains. 6 Another strand of literature studies the business cycle and policy implications of com- 5 In Krugman (1987) there is no explicit consideration given to the oil sector, but the increased in ‡ow of foreign currency that follows natural resource discoveries is approximated with a direct transfer payment from the foreign to the home country. 6 Their framework is richer in other dimensions from which we are abstracting.…”

“…6 Another strand of literature studies the business cycle and policy implications of com- 5 In Krugman (1987) there is no explicit consideration given to the oil sector, but the increased in ‡ow of foreign currency that follows natural resource discoveries is approximated with a direct transfer payment from the foreign to the home country. 6 Their framework is richer in other dimensions from which we are abstracting. They consider the role of physical capital accumulation and di¤erences in capital intensities and capital mobility between sectors.…”

Revisiting the Commodity Curse: A Financial Perspective

“…In the robustness section we will allow for different labor shares in the traded and non-traded sectors to capture the fact that labor share is higher in the traded sector. We then set the risk premium elasticity to x = 0.01 for the debt-elastic case higher than the 0.005 estimated by Bergholt and Larsen (2016) for the Norwegian economy.…”