News Shocks in Open Economies: Evidence from Giant Oil Discoveries*

Abstract

This article explores the effect of news shocks in open economies using worldwide giant oil and gas discoveries as a directly observable measure of news shocks about future output—the delay between a discovery and production is on average four to six years. We first analyze the effects of a discovery in a two-sector small open economy model with a resource sector. We then estimate the effects of giant oil and gas discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil or gas discovery, the current account and saving rate decline for the first five years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, whereas GDP does not increase until after five years. Employment rates fall slightly and remain low for a sustained period.

Resource discovery and the politics of fiscal decentralization

“…Many recent notable studies of resource curse use this data source (see Lei andMichaels, 2014 andArezki et al, 2014). The discovery dates of giant and major mineral deposits are sourced from MinEx Consulting which reports the geographic coordinates of such events over the period 1950 to 2012.…”

Commodity Prices and Labour Market Dynamics in Small Open Economies

“…Longterm considerations appear to be much more relevant in this regards as expanding production requires expensive investment over several years. From this perspective, the findings in Arezki et al (2015) are of great interest to our work. Arezki et al (2015) explore the empirical relationship between "news" on giant oil discoveries and macroeconomic variables for open economies in a panel VAR.…”

“…From this perspective, the findings in Arezki et al (2015) are of great interest to our work. Arezki et al (2015) explore the empirical relationship between "news" on giant oil discoveries and macroeconomic variables for open economies in a panel VAR. Upon the breaking of the "news," consumption rises as future permanent income has increased.…”

“…However, shock amplification depends sensitively on the split of vacancy posting costs into variable and fixed components -this is not the case in our baseline specification. Second, in principle, our framework can also capture the dynamics of a news shock about increased future commodity production analysed in Arezki et al (2015). Finally, when augmenting the framework to allow for non-traded goods our results remain fundamentally unchanged.…”

“…Figure 8 shows that our model without investment into commodity supply can replicate these observations when the elasticity of substitution between traded goods is high with the obvious exception being investment. As in Arezki et al (2015), the news shock occurs five years prior to production going online. Under the baseline parameterisation (solid blue lines) with a trade elasticity equal to 2, the model implies a rise in consumption and a trade balance deficit.…”