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Granger predictability of real oil prices by us money and inflation in Markov-switching regimes

Author

Listed:
  • Emrah I. Cevik

    (Tekirdag Namik Kemal University)

  • Sel Dibooglu

    (Missouri Western State University)

  • Max Gillman

    (University of Missouri-St. Louis
    Corvinus University of Budapest
    CERGE-EI Prague
    CERS-IE Budapest)

  • Szilard Benk

    (Corvinus University of Budapest)

Abstract

This paper presents new evidence that US money supply growth and inflation rates Granger predict real oil prices in a two-regime Markov switching vector autoregression (MS-VAR) model. An asset pricing theory motivates the empirical work by showing how jumps in real oil prices approximately follow jumps in the discount factor to keep constant the competitive return to oil capital. Using monthly data from January 1978 to June 2024, we consider alternative data combinations of US money supply growth rates, US inflation rates, and real oil prices to establish volatility regimes through goodness of fit testing. We set baseline model as that model with the highest likelihood in explaining the real oil price, which combines M2, the CPI less energy prices (CPIE), and real oil prices. Robustness considers two M2 variants combined with the CPIE that have the next highest likelihoods, for two alternative models. In the high volatility regime, results show robust Granger predictability of real oil prices by the baseline M2 and the M2 variants. In the low volatility regime for the baseline model, the CPIE inflation rate Granger predicts real oil prices. The paper contributes these new MS-VAR results that combined with the theory provide nuanced non-conventional support that monetary factors contribute to heightened real oil price episodes in volatile times as well as in calmer periods.

Suggested Citation

  • Emrah I. Cevik & Sel Dibooglu & Max Gillman & Szilard Benk, 2025. "Granger predictability of real oil prices by us money and inflation in Markov-switching regimes," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 15(1), pages 29-52, March.
  • Handle: RePEc:spr:eurase:v:15:y:2025:i:1:d:10.1007_s40822-024-00305-8
    DOI: 10.1007/s40822-024-00305-8
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    Keywords

    US inflation and money supply; real oil prices; Volatility regimes; Present value; Granger-predictability; Impulse responses;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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