IDEAS home Printed from https://ideas.repec.org/a/vrs/reoecp/v21y2021i3p309-346n2.html
   My bibliography  Save this article

Oil price shock in the US and the euro area – evidence from the shadow rate and the term premium

Author

Listed:
  • Pažický Martin

    (Comenius University in Bratislava, Faculty of Management, Odbojárov 10, 820 05 Bratislava, Slovak Republic)

Abstract

The aim of this article is to investigate the consequences of oil price changes for the economy of the US and the euro area. Oil price transmission channel is assessed using Granger causalities and structural vector autoregressive (VAR) specifications (applying the Cholesky factorization and the restrictions following the method of Blanchard and Quah). The conventional oil price transmission channel is extended by a shadow policy rate and term premium, as the importance of both indicators has been growing rapidly in recent years. The results confirm that the oil price shock is not negligible in the aftermath of the Global Financial Crisis and in the subsequent period of monetary policy normalization. The findings are confirmed by the outcomes of the Bayesian VAR specification with sign restrictions. The consequences of changes in oil prices have significantly grown since the introduction of unconventional monetary instruments. The magnitude of the response of industrial production, price level and shadow interest rate to the oil price shock is strongest in the period corresponding to the unconventional monetary policy. In many cases, however, the reaction is short-lived. The conventional instrument (policy rate) in the euro area has still not been sufficient to stabilize the economy in the recent period of monetary policy normalization in the US.

Suggested Citation

  • Pažický Martin, 2021. "Oil price shock in the US and the euro area – evidence from the shadow rate and the term premium," Review of Economic Perspectives, Sciendo, vol. 21(3), pages 309-346, September.
    • Handle: RePEc:vrs:reoecp:v:21:y:2021:i:3:p:309-346:n:2
    DOI: 10.2478/revecp-2021-0014
    as

    Download full text from publisher

    File URL: https://doi.org/10.2478/revecp-2021-0014
    Download Restriction: no
    File URL: https://libkey.io/10.2478/revecp-2021-0014?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Marta Bańbura, 2008. "Large Bayesian VARs," 2008 Meeting Papers 334, Society for Economic Dynamics.
    3. Juan F. Rubio-Ramírez & Daniel F. Waggoner & Tao Zha, 2010. "Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 665-696.
    4. Paul Hubert & Fabien Labondance, 2018. "The Effect of ECB Forward Guidance on the Term Structure of Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 193-222, December.
    5. Atsushi Sekine & Takayuki Tsuruga, 2018. "Effects of commodity price shocks on inflation: a cross-country analysis," Oxford Economic Papers, Oxford University Press, vol. 70(4), pages 1108-1135.
    6. Jing Cynthia Wu & Fan Dora Xia, 2016. "Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 253-291, March.
    7. Claudio Borio & Anna Zabai, 2018. "Unconventional monetary policies: a re-appraisal," Chapters, in: Peter Conti-Brown & Rosa M. Lastra (ed.), Research Handbook on Central Banking, chapter 20, pages 398-444, Edward Elgar Publishing.
    8. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
    9. Choi, Sangyup & Furceri, Davide & Loungani, Prakash & Mishra, Saurabh & Poplawski-Ribeiro, Marcos, 2018. "Oil prices and inflation dynamics: Evidence from advanced and developing economies," Journal of International Money and Finance, Elsevier, vol. 82(C), pages 71-96.
    10. Brent Bundick & Trenton Herriford & Andrew Lee Smith, 2017. "Forward Guidance, Monetary Policy Uncertainty, and the Term Premium," Research Working Paper RWP 17-7, Federal Reserve Bank of Kansas City.
    11. Glenn D. Rudebusch & Tao Wu, 2008. "A Macro‐Finance Model of the Term Structure, Monetary Policy and the Economy," Economic Journal, Royal Economic Society, vol. 118(530), pages 906-926, July.
    12. G. Peersman, 2011. "Macroeconomic Effects of Unconventional Monetary Policy in the Euro Area," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/734, Ghent University, Faculty of Economics and Business Administration.
    13. Leonardo Gambacorta & Boris Hofmann & Gert Peersman, 2014. "The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross‐Country Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(4), pages 615-642, June.
    14. Peersman, Gert, 2011. "Macroeconomic Effects of Unconventional Monetary Policy in the Euro Area," CEPR Discussion Papers 8348, C.E.P.R. Discussion Papers.
    15. Glenn D. Rudebusch & Brian P. Sack & Eric T. Swanson, 2007. "Macroeconomic implications of changes in the term premium," Review, Federal Reserve Bank of St. Louis, vol. 89(Jul), pages 241-270.
    16. Gert Peersman, 2012. "Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound," 2012 Meeting Papers 400, Society for Economic Dynamics.
    17. Melolinna, Marko, 2012. "Macroeconomic shocks in an oil market var," Working Paper Series 1432, European Central Bank.
    18. Leo Krippner, 2011. "Modifying Gaussian term structure models when interest rates are near the zero lower bound," CAMA Working Papers 2011-36, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    19. Jorge Fornero & Markus Kirchner, 2018. "Learning about Commodity Cycles and Saving-Investment Dynamics in a Commodity-Exporting Economy," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 205-262, March.
    20. Reuven Glick & Sylvain Leduc, 2018. "Unconventional Monetary Policy and the Dollar: Conventional Signs, Unconventional Magnitudes," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 103-152, December.
    21. John Elder & Apostolos Serletis, 2010. "Oil Price Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1137-1159, September.
    22. Marco J. Lombardi & Feng Zhu, 2018. "A Shadow Policy Rate to Calibrate U.S. Monetary Policy at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 305-346, December.
    23. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
    24. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 3-43, March.
    25. Coenen, Günter & Ehrmann, Michael & Gaballo, Gaetano & Hoffmann, Peter & Nakov, Anton & Nardelli, Stefano & Persson, Eric & Strasser, Georg H., 2017. "Communication of monetary policy in unconventional times," CFS Working Paper Series 578, Center for Financial Studies (CFS).
    26. repec:hal:spmain:info:hdl:2441/61ma1iq1299m89uud61kkjcjot is not listed on IDEAS
    27. Unknown, 2005. "Forward," 2005 Conference: Slovenia in the EU - Challenges for Agriculture, Food Science and Rural Affairs, November 10-11, 2005, Moravske Toplice, Slovenia 183804, Slovenian Association of Agricultural Economists (DAES).
    28. Sarah Mouabbi & Jean‐Guillaume Sahuc, 2019. "Evaluating the Macroeconomic Effects of the ECB's Unconventional Monetary Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(4), pages 831-858, June.
    29. Lippi, Francesco & Nobili, Andrea, 2008. "Oil and the Macroeconomy: A Structural VAR Analysis with Sign Restrictions," CEPR Discussion Papers 6830, C.E.P.R. Discussion Papers.
    30. Mirko Abbritti & Salvatore Dell’Erba & Antonio Moreno & Sergio Sola, 2018. "Global Factors in the Term Structure of Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 301-340, March.
    31. Ronayne, David, 2011. "Which Impulse Response Function?," The Warwick Economics Research Paper Series (TWERPS) 971, University of Warwick, Department of Economics.
    32. Carboni, Giacomo, 2014. "Term premia implications of macroeconomic regime changes," Working Paper Series 1694, European Central Bank.
    33. Michael Woodford, 2012. "Methods of policy accommodation at the interest-rate lower bound," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 185-288.
    34. Don Bredin & John Elder & Stilianos Fountas, 2010. "The Effects of Uncertainty about Oil Prices in G-7," Working Papers 200840, Geary Institute, University College Dublin.
    35. Benjamin H Cohen & Peter Hördahl & Dora Xia, 2018. "Term premia: models and some stylised facts," BIS Quarterly Review, Bank for International Settlements, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Babecká Kucharčuková, Oxana & Claeys, Peter & Vašíček, Bořek, 2016. "Spillover of the ECB's monetary policy outside the euro area: How different is conventional from unconventional policy?," Journal of Policy Modeling, Elsevier, vol. 38(2), pages 199-225.
    2. Fiorelli, Cristiana & Meliciani, Valentina, 2019. "Economic growth in the era of unconventional monetary instruments: A FAVAR approach," Journal of Macroeconomics, Elsevier, vol. 62(C).
    3. Aßhoff, Sina & Belke, Ansgar & Osowski, Thomas, 2021. "Unconventional monetary policy and inflation expectations in the Euro area," Economic Modelling, Elsevier, vol. 102(C).
    4. Pagliari, Maria Sole, 2024. "Does one (unconventional) size fit all? Effects of the ECB’s unconventional monetary policies on the euro area economies," European Economic Review, Elsevier, vol. 168(C).
    5. Jin, Xisong & Nadal De Simone, Francisco, 2020. "Monetary policy and systemic risk-taking in the Euro area investment fund industry: A structural factor-augmented vector autoregression analysis," Journal of Financial Stability, Elsevier, vol. 49(C).
    6. Stefan Behrendt, 2017. "Unconventional Monetary Policy Effects on Bank Lending in the Euro Area," Jena Economics Research Papers 2017-002, Friedrich-Schiller-University Jena.
    7. Anastasios Evgenidis & Apostolos Fasianos, 2021. "Unconventional Monetary Policy and Wealth Inequalities in Great Britain," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(1), pages 115-175, February.
    8. Yılmaz, Derya, 2015. "Unconventional Monetary Policies in the Eurozone: Considering Theoretical Backgrounds and Policy Outcomes," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 6(3), pages 51-68, July.
    9. Grahame Johnson & Sharon Kozicki & Romanos Priftis & Lena Suchanek & Jonathan Witmer & Jing Yang, 2020. "Implementation and Effectiveness of Extended Monetary Policy Tools: Lessons from the Literature," Discussion Papers 2020-16, Bank of Canada.
    10. Kabundi, Alain & De Simone, Francisco Nadal, 2020. "Monetary policy and systemic risk-taking in the euro area banking sector," Economic Modelling, Elsevier, vol. 91(C), pages 736-758.
    11. Roman Horvath & Klara Voslarova, 2017. "International spillovers of ECB’s unconventional monetary policy: the effect on Central Europe," Applied Economics, Taylor & Francis Journals, vol. 49(24), pages 2352-2364, May.
    12. Weale, Martin & Wieladek, Tomasz, 2022. "Financial effects of QE and conventional monetary policy compared," Journal of International Money and Finance, Elsevier, vol. 127(C).
    13. Christiaan Pattipeilohy, 2016. "A comparative analysis of developments in central bank balance sheet composition," DNB Working Papers 510, Netherlands Central Bank, Research Department.
    14. Klara Halova & Roman Horvath, 2015. "International Spillovers of ECB’s Unconventional Monetary Policy: The Effect on Central and Eastern Europe," Working Papers 351, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).
    15. Francisco Serranito & Philipp RODERWEIS & Jamel Saadaoui, 2023. "Is Quantitative Easing Productive? The Role of Bank Lending in the Monetary Transmission Process," EconomiX Working Papers 2023-17, University of Paris Nanterre, EconomiX.
    16. Chen, Zhengyang, 2019. "The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission," MPRA Paper 96339, University Library of Munich, Germany.
    17. Marzie Taheri Sanjani, 2014. "Financial Frictions in Data: Evidence and Impact," IMF Working Papers 2014/238, International Monetary Fund.
    18. Meinusch, Annette & Tillmann, Peter, 2016. "The macroeconomic impact of unconventional monetary policy shocks," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 58-67.
    19. Dias, Gustavo Fruet & Kapetanios, George, 2018. "Estimation and forecasting in vector autoregressive moving average models for rich datasets," Journal of Econometrics, Elsevier, vol. 202(1), pages 75-91.
    20. christiaan Pattipeilohy, 2016. "A comparative analysis of developments in central bank balance sheet composition," BIS Working Papers 559, Bank for International Settlements.

    More about this item

    Keywords

    oil price; unconventional monetary policy; VAR; shadow rate; term premium;
    All these keywords.

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:vrs:reoecp:v:21:y:2021:i:3:p:309-346:n:2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.sciendo.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.