Oil Price Shocks and Policy Uncertainty: New Evidence on the Effects of US and Non-US Oil Production

Abstract

Important interaction has been established for US economic policy uncertainty with a number of economic and financial variables including oil prices. This paper examines the dynamic effects of US and non-US oil production shocks on economic policy uncertainty using a structural VAR model. Such an examination is motivated by the substantial increases in US oil production in recent years with implications for US political and economic security. Positive innovations in US oil production are associated with decreases in US economic policy uncertainty. The economic forecast interquartile ranges about the US CPI and about federal/state/local government expenditures are particularly sensitive to innovations in US oil supply shocks. Shocks to US oil supply disruption causes rises in the CPI forecast uncertainty and accounts for 21% of the overall variation of the CPI forecaster disagreement. Dis-aggregation of oil production shocks into US and non-US oil production yield novel results. Oil supply shocks identified by US and non-US origins explain as much of the variation in economic policy uncertainty as structural shocks on the demand side of the oil market.JEL classification: E44, G12, Q43

The impacts of global economic policy uncertainty on stock market returns in regime switching environment: Evidence from sectoral perspectives

“…The literature of empirical finance has been proliferating and flourishing with studies of global risk factors and stock market returns. It is not surprising as it has been documented that the global risk factors, such as geopolitical risk, international economic policy uncertainty (EPU), and oil price, have significant impacts on stock performance at aggregated stock market level, industry level, and firm level (Antonakakis, Chatziantoniou, & Filis, ; Antonakakis, Gupta, Kollias, & Papadamou, ; Caldaray & Iacoviello, ; Demirer, Jategaonkar, & Khalifa, ; Ferson & Harvey, ; Kang et al, & ; Kang & Ratti, ; Moya‐Martínez, Ferrer‐Lapeña, & Escribano‐Sotos, ; Naifar & Hammoudeh, ; Naifar, Mroua, & Bahloul, ; Reboredo & Naifar, ; Reboredo & Uddin, ). To date, many empirical studies have investigated the relationship between global risk factors and stock market returns in capital asset pricing model (CAPM) framework and linear framework (Sadorsky & Henriques, ; Mohanty, Nandha, & Bota, ; Waszczuk, ; Brogaard & Detzel, ; Moya‐Martínez et al, ; Demirer et al, ; Naifar et al, ).…”

“…Second, the GEPU annihilates the financing environment and the degree of economic freedom that affect stock market performances through a reduced amount of both local and international investors' participations. Third, the GEPU influences commodity market, such as oil prices, that further affects stock market and economic performances (see, Kang, Gracia, & Ratti, ; Kang & Ratti, & Kang, Ratti, & Vespignani, ). The recent oil shocks were the great example of that, where oil revenue‐dependent economies suffered due to oil production policy of OPEC countries.…”

“…Kang et al () show that policy uncertainty in China has negative lagged effects on the real stock returns. Kang et al, ( & ) show that shocks in EPU create stock price drops. Under nonlinear assumption, with time‐varying approach, Ko and lee () find the negative nexus of EPU and stock price but impacts vary with times.…”

Is the recent low oil price attributable to the shale revolution?

“…Using a variant of the Kilian (2009) model, however, we also address whether the low crude oil price is attributable to the U.S. shale production but allow structural breaks in the model. The Kilian (2009) model is popular and widely examined and extended by studies such as Kilian and Park (2009), Kang, Ratti and Vespignani (2017), among others. The difference between these studies and this paper is that we allow structural breaks in the Kilian model because changes in the oil production technology such as shale production in the U.S. and changes on the demand side due to changes in environmental regulation may cause changes in the dynamics of the oil market.…”

On the Impact of Policy Uncertainty on Oil Prices: An Asymmetry Analysis

“…While Bernanke (1983), Brennan and Schwartz (1985), Majd and Pindyck (1987), Brennan (1990), Triantis and Hodder (1990), and Elder and Serletis (2010) emphasize its impact on investment, Kim and Loungani (1992), Hooker (1996), and Finn (2000) emphasize its impact on economic activity. Furthermore, impact of oil price uncertainty on consumption and investment is considered by Edelstein and Kilian (2009) and on economic activity and stock returns by Kang et al (2017a).…”