The Effects of Oil Price Uncertainty on Global Real Economic Activity

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Abstract

This paper investigates the effect of oil price uncertainty on global real economic activity using a quarterly vector autoregressive model with stochastic volatility in mean. Stochastic volatility allows oil price uncertainty to vary separately from changes in the level of oil prices, and allows one to incorporate an extraneous indicator of oil price uncertainty such as realized volatility that greatly improves the precision of the estimated uncertainty series. The estimation results show that an oil price uncertainty shock has negative effects on world industrial production all else equal. For example, it is shown that a doubling of oil price volatility is associated with a cumulative decline as high as 0.3 percentage points in world industrial production.

Original languageEnglish
Pages (from-to)1113-1135
Number of pages23
JournalJournal of Money, Credit and Banking
Volume46
Issue number6
DOIs
Publication statusPublished - 2014 Sep

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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