## _wp07110

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---

### I. INTRODUCTION — Research motivation and contributions
- Research motivation and gaps:
  - Large literature focuses on real economic growth and consumer price inflation in oil-importing countries; much smaller literature studies impact on external accounts.
  - Policy premise challenged: oil-price shocks thought to force borrowing from abroad; alternative concern is insufficient international risk sharing.
  - Recent developments (changes in crude oil market; large global external imbalances) motivate renewed analysis.
- Scope and contributions:
  - Comprehensive analysis of effects of oil price shocks on external balances during 1975–2004.
  - Uses new data sets and methodologies to document dynamic effects of demand and supply shocks in the crude oil market on external balances.
  - Examines changing importance of shocks over time using historical decompositions.
- Departures from earlier studies:
  - Longer time span and more oil-price shock episodes.
  - Greater disaggregation of external accounts: separates oil-trade balance and non-oil trade balance; considers valuation of net foreign assets (NFA), including capital gains/losses.
  - Multilateral perspective: includes Japan, the United States, oil-importing middle-income economies, OPEC members, and broader oil-exporting economies.
  - Methodological improvements: exploits advances in measurement of shocks in the oil market (Kilian 2006c); controls for reverse causality; distinguishes crude oil supply shocks, precautionary demand shocks, and global demand for industrial commodities.

### I. INTRODUCTION — Main results and interpretive insights (selected)
- Trade balance effects:
  - Overall effect of oil shocks on the trade balance depends critically on response of the non-oil trade balance.
  - Responses differ systematically between the United States and other oil-importing countries.
  - Middle-income oil-importing economies do not differ systematically from the Euro area or Japan.
- Valuation effects on NFA:
  - Using Lane and Milesi-Ferretti (2006) NFA data, valuation effects documented for the United States, other oil-importing economies, and oil exporters.
  - Capital gains and losses play an important role for net foreign asset dynamics, particularly in response to oil demand shocks.
  - Increased international financial integration:
    - tends to cushion effect of oil shocks on NFA positions for major oil exporters and for the United States.
    - may amplify the effect for other oil importers.

### Organization
- Section 2: mechanisms by which oil price fluctuations drive external balances and limitations of exogeneity assumptions.
- Section 3: econometric methodology.
- Section 4: data.

---

### II. THEORETICAL BACKGROUND
- Frameworks and limiting cases:
  - Financial autarky: external current-account imbalances cannot emerge in response to oil price shocks.
  - Perfect capital mobility:
    - Temporary oil-price shock → no internal adjustment and a purely transitory flow imbalance.
    - Permanent oil-price shock → full internal adjustment (may be costly; can produce external imbalances).
- Two channels of external adjustment:
  - Trade (macroeconomic) channel: quantities and prices of exported/imported goods adjust; oil price increase lowers real income in importers, curtails expenditure/investment, induces importer currency depreciation and exporter appreciation, and can cause at least temporary fall in real output for importers.
  - Financial (valuation) channel: changes in external portfolio positions and asset prices can cushion or exacerbate external balance effects; bond and equity prices and exchange rates typically respond faster than goods prices and quantities.
- Limitations of standard frameworks:
  - Oil prices often treated as exogenous, but global macroeconomic fluctuations influence crude oil prices.
  - Lack of distinction between demand and supply shocks; demand and supply shocks have qualitatively and quantitatively different macroeconomic effects.
- Empirical implication:
  - Need structural model distinguishing supply shocks, aggregate demand shocks for industrial commodities, and oil-market specific demand shocks (precautionary demand).

---

### III. EMPIRICAL METHODOLOGY — Overview and identification
- Two main steps:
  1. Trace fluctuations in the real price of crude oil to underlying demand and supply shocks.
  2. Assess responses of external accounts of selected countries and country groups to identified shocks.
- Preconditions:
  - If identified shocks are predetermined relative to macro aggregates and external accounts, standard regression methods can estimate dynamic responses and historical contributions.

### III.A. Construction of demand and supply shocks (Kilian 2006c identification)
- Structural VAR on monthly data for vector z_t: percent change in global crude oil production; measure of global real economic activity in industrial commodity markets; real price of crude oil.
- VAR allows for two years’ worth of lags.
- Three structural shocks:
  1. ε1t — oil supply shock (global supply of crude oil).
  2. ε2t — aggregate demand shock (shocks to global demand for industrial commodities including crude oil).
  3. ε3t — oil-market specific demand shock (precautionary demand), orthogonal to other shocks.
- Core identifying assumptions:
  1. Crude oil production will not respond to oil demand shocks within the month.
  2. Increases in the real price of oil driven by oil-market specific demand shocks will not lower global real economic activity in industrial commodity markets within the month.
  3. Innovations to the real price of oil not explained by oil supply shocks or aggregate demand shocks are oil-market specific demand shocks.
- Distinct dynamic effects on real oil price:
  - Oil-market specific demand → immediate and persistent increase.
  - Aggregate demand → delayed but sustained increase.
  - Oil supply disruption → transitory increase within the first year.
- Historical decomposition:
  - Real oil price fluctuations decomposed into cumulative effects of each shock.
  - Major surges typically driven by aggregate demand shocks and oil-market specific demand shocks rather than oil supply shocks (example: increase after 2003 driven entirely by cumulative effects of positive global demand shocks).
- Monthly-to-annual aggregation:
  - Annual shocks constructed as averages of monthly structural innovations:
    - ζ̂_{j,t} = 1/12 ∑_{i=1}^{12} ε̂_{j,t,i}, for j = 1,...,3.
  - Although z_t data extend back to 1973, VAR estimation loses two years; annual shock series extends back to 1975.

### III.B. Estimation of dynamic effects
- Let y_t denote a stationary macro aggregate (e.g., share of trade balance in GDP).
- Treat ζ̂_{j,t} (j = 1,...,3) as predetermined with respect to y_t.
- Regression framework (model (2) in text):
  - y_{t+h} = ψ_{h} ζ̂_{j,t} + δ + Σ_{i=1}^{h} ... + u_t, where u_t is potentially serially correlated and ζ̂_{j,t} serially uncorrelated.
  - Impulse response defined as dy_{t+1}/dζ̂_{j,t}, estimated via ψ_{h}.
- Practical choices:
  - Maximum horizon set to five years.
  - Equation-by-equation approach used under premise annual shocks are mutually uncorrelated.
  - Contemporaneous correlation of annual shocks reported in Table 1 ranges between -2 and 11 percent; treated as sufficiently low.
- Alternative approaches considered but not adopted due to short sample, overfitting, or exogeneity requirements.

---

### IV. DATA — Variables, sources, and sample
- Six measures of external balance considered:
  1. Change in Net Foreign Assets ≡ Current Account + Capital Gains
  2. Current Account ≡ Merchandise Trade Balance + Service Trade Balance + Income Balance
  3. Merchandise Trade Balance ≡ Oil Trade Balance + Non-Oil Merchandise Trade Balance
  4. Oil Trade Balance
  5. Non-Oil Merchandise Trade Balance
  6. Capital Gains on Gross Foreign Assets and Liabilities
- Trade balance refers to merchandise trade balance (services excluded for data-quality reasons); income balance excluded from some analyses because hard to interpret without detailed asset positions.
- Data sources:
  - NFA data from Lane & Milesi-Ferretti (2006).
  - All other data from IMF’s World Economic Outlook database.
- Sample and frequency:
  - Shocks measured monthly; external account data typically annual → annual aggregation via ζ̂_{j,t} average.
  - Annual shock series begins in 1975.

### IV. DATA — Key variable definitions (selected)
- Gross domestic product, current prices, U.S. dollars: Units/Scale: Billions of US dollars; Variable name: gdp; Source: IMF World Economic Outlook.
- Net external position: Units/Scale: Millions of US dollars; Variable name: nfa; Source: Lane/Milesi-Ferretti.
- Net foreign assets as a share of GDP: Calculation: (nfa /1000) / gdp) * 100; Units/Scale: Percent of GDP; Variable name: nfa_gdp.
- Current account balance as a share of GDP: Calculation: (ca /gdp) * 100; Variable name: ca_gdp.
- Oil trade balance as a share of GDP: Calculation: (tbo/gdpd) * 100; Variable name: tbo_gdp.
- Change in NFA as a share of GDP: Calculation: ((dnfa/1000) / gdp) * 100; Variable name: dnfa_gdp.
- Capital gains (billions of US dollars): Calculation: (dnfa/1000) – ca; Variable name: capgain.
- Capital gains as a share of GDP: Calculation: (capgain/gdp) * 100; Variable name: capgain_gdp.

### IV. DATA — Country groupings (selected)
- Fuel exporters (26) listed (examples): Algeria, Angola, Azerbaijan, Bahrain, Brunei, Congo (Rep. of), Ecuador, Gabon, Indonesia, Iran, Kazakhstan, Kuwait, Libya, Mexico, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, Syria, Trinidad and Tobago, Turkmenistan, United Arab Emirates, Venezuela, Yemen.
- OPEC (10): Algeria, Indonesia, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela.
- Middle-Income Economies (46) listed (examples): Albania, Argentina, Belarus, Bosnia and Herzegovina, Botswana, Brazil, Bulgaria, Chile, Colombia, Costa Rica, Croatia, Czech Republic, Dominican Republic, Equatorial Guinea, Estonia, Fiji, Hong Kong, Hungary, Jordan, Korea, Latvia, Lebanon, Lithuania, Macedonia, Malaysia, Malta, Mauritius, Namibia, Panama, Paraguay, Peru, Philippines, Poland, Romania, Singapore, Slovak Republic, Slovenia, South Africa, Swaziland, Taiwan, Thailand, Tunisia, Turkey, Ukraine, Uruguay, Yugoslavia.
- Emerging Asia (7): Hong Kong, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand.
- Latin America (10): Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Panama, Paraguay, Peru, Uruguay.
- United States, Japan, Euro Area examined individually; Canada and UK grouped.

### IV. DATA — Table 1 correlations of annual shocks (1975-2004)
- Correlation matrix entries:
  - Oil Supply Shock vs Oil Supply Shock: 1
  - Oil Supply Shock vs Aggregate Demand Shock: -0.02
  - Oil Supply Shock vs Oil-Specific Demand Shock: 0.11
  - Aggregate Demand Shock vs Aggregate Demand Shock: 1
  - Aggregate Demand Shock vs Oil-Specific Demand Shock: -0.08
  - Oil-Specific Demand Shock vs Oil-Specific Demand Shock: 1
- NOTES: oil shocks obtained from model (1).

### IV. DATA — Table 2 (selected correlations for United States; share in GDP)
- Change in NFA: Oil Supply 0.06; Aggregate Demand -0.08; Oil-Specific Demand 0.13
- Current Account: Oil Supply 0.03; Aggregate Demand -0.13; Oil-Specific Demand -0.19
- Trade Balance: Oil Supply -0.04; Aggregate Demand 0.04; Oil-Specific Demand -0.10
- Oil Trade Balance: Oil Supply 0.01; Aggregate Demand -0.31; Oil-Specific Demand -0.49
- Non-Oil Trade Balance: Oil Supply -0.15; Aggregate Demand 0.19; Oil-Specific Demand 0.27
- Income Balance: Oil Supply 0.20; Aggregate Demand -0.05; Oil-Specific Demand 0.18
- Capital Gain: Oil Supply -0.17; Aggregate Demand 0.15; Oil-Specific Demand 0.18
- NOTES: innovations estimated as residuals of AR(2) models for each external balance measure.

---

### V. RESULTS — Impulse response general findings (across country groups)
- Any shock that raises the real price of oil will push a typical oil importer's oil trade balance into deficit; timing and magnitude depend on shock type.
- Positive aggregate demand shocks: oil trade deficit tends to emerge with delay.
- Oil-specific demand increases (precautionary demand) and negative oil supply shocks: immediate oil trade deficit; oil-specific demand increase typically more sustained and larger than supply shocks.
- Non-oil trade balances often improve in response to oil-price-raising shocks and partially offset oil trade deficit.
- Valuation effects (capital gains/losses) occur and can offset or amplify trade imbalances; importance depends on international asset positions and currency movements.
- International financial integration can cushion or amplify effects depending on asset ownership and currency valuation responses.

### V. RESULTS — Oil exporters (summary)
- Oil trade balance:
  - Negative supply shocks or positive demand shocks generally improve oil exporters' oil trade balance; stronger and more significant for OPEC.
  - Temporary improvement consistent with falling export quantities as demand decreases.
  - Canada and the U.K.: much smaller and largely statistically insignificant oil-trade balance responses, except for oil supply disruptions.
- Non-oil trade balance:
  - Tends to deteriorate for oil exporters after favorable oil shocks; demand shocks cause significant medium-run deterioration; supply disruptions largely insignificant.
- Capital gains:
  - Oil-supply disruptions cause significant capital losses for oil exporters (column 5 Figures 4 and 5); these losses can offset current account improvements making change-in-NFA responses insignificant.
  - For Canada and the U.K., capital losses from supply disruptions play a much less important role.

### V. RESULTS — High-income oil-importing economies (United States, Japan, Euro area)
- Oil trade balance:
  - All oil shocks negatively impact oil trade balance; oil-specific demand increases cause immediate, persistent, highly significant deficits.
  - Effect as share of GDP is smaller for the United States than for Japan or the Euro area.
- Non-oil trade balance:
  - Tends to improve in response to oil-price-raising shocks; cross-country differences:
    - Euro area: significant non-oil trade surplus in response to adverse oil supply shocks.
    - U.S.: unanticipated aggregate demand increases associated with delayed but significant non-oil trade surplus; non-oil trade increases significantly in response to oil-specific demand shocks (with delay).
    - Japan: similar to U.S. in responses to oil-specific demand shocks.
- Trade balance (net effect):
  - U.S.: positive aggregate demand shock causes initial trade deficit then significant surplus after three years; some evidence of surplus for oil-specific demand increases.
  - Other advanced economies: oil-specific demand increases cause immediate, persistent, highly significant trade deficits; aggregate demand expansions cause temporary trade deficits with ~two-year delay.
- Capital gains (valuation effects):
  - U.S.: significant short-run capital gains followed by significant capital losses in years 3 and 4 in response to aggregate demand shocks.
  - Euro area and Japan: roughly mirror U.S. response (mirror-image pattern).
  - Oil supply disruptions: small negative, statistically insignificant capital-gain responses across U.S., Euro area, Japan.
  - Precautionary oil-demand increase: initial capital loss, followed by significant capital gain in years 3 and 4.
  - Valuation effects can dampen impacts for the U.S. and oil exporters, but can magnify impacts for the Euro area and Japan.
- Current account and change in NFA:
  - U.S. NFA position: does not change significantly in response to oil supply shock; may improve with some delay in response to oil-market specific demand increases; temporary improvement in response to positive aggregate demand shocks but preceded by current account deficit.
  - Other advanced oil importers: tend to experience current account deficits and reductions in NFA in response to the same shocks (declines not always statistically significant).

### V. RESULTS — Middle-income oil-importing economies
- Oil trade balance:
  - Systematically falls in response to shocks that raise the price of oil.
  - Responses to oil supply disruptions and oil-specific demand increases: highly significant.
  - Response to aggregate demand shocks: marginally significant.
- Non-oil trade balance:
  - Oil supply disruption: negative (not precisely estimated).
  - Positive aggregate demand shock: positive and statistically significant.
  - Oil-specific demand shock: not statistically different from zero.
- Overall trade balance:
  - Aggregate demand shock raising real oil price: marginally significant improvement on impact.
  - Oil supply disruptions and precautionary demand increases: significant deterioration.
  - Non-oil trade balance responses partially offset oil-trade balance, similar to advanced importers.
- Valuation effects:
  - Statistically significant capital loss after the second year in response to a positive aggregate demand shock and a significant capital gain in years 3 and 4 (qualitatively similar to Euro area and Japan; roughly mirror image of U.S. response).
  - Responses of capital gains to oil supply disruptions and oil-specific demand increases largely statistically insignificant.
- Current account:
  - Deteriorates significantly in response to oil supply disruptions and to an increase in oil-specific demand.
  - For supply disruptions: driven mainly by trade balance.
  - For oil-specific demand shocks: driven by trade balance and exacerbated by income payments, transfers, and services.
  - Response to positive aggregate demand shock: significantly positive on impact, then turns significantly negative subsequently.
- Net foreign assets (NFA):
  - Deteriorate in all cases and in some cases significantly.
  - Timing of decline appears driven primarily by valuation effects rather than current account.

### V. RESULTS — Latin America versus Emerging Asia (within middle-income group)
- Both groups: oil trade balance shows negative response to all three shocks.
- Non-oil trade balance:
  - Oil supply disruptions: more negative on impact in Latin America.
  - Oil-demand shocks: less pronounced response in Latin America.
  - Emerging Asia: decline in non-oil trade balance in year 3 consistent with decline of U.S. real GDP after aggregate demand increases due to export orientation.
- Overall trade balance: Emerging Asia experiences more significant overall trade deficit in response to oil-specific demand increases than Latin America.
- Current account: deteriorates more in Emerging Asia owing to non-oil trade balance.
- Interpretation: Latin America’s limited access to international capital markets may have discouraged borrowing in response to oil demand shocks.
- Capital gains/losses:
  - Latin America: little evidence of significant capital gains or losses in response to oil shocks (consistent with limited exchange-rate flexibility and currencies depreciating less than the U.S. dollar during much of the sample).
  - Emerging Asia: marginally significant capital loss after two years and statistically significant large capital gain after three years in response to positive aggregate demand shocks; no significant responses to other shocks.

### V. RESULTS — Historical decompositions (selected findings)
- Model tracks major shifts in external accounts (e.g., rapid NFA accumulation by OPEC after 1999; growing U.S. current account deficit since late 1990s).
- Relative importance of demand and supply shocks changes across episodes:
  - OPEC current account deficit of 1998 associated with temporary drop in oil-specific demand following Asian crisis of 1997.
  - OPEC current account deficit of 1991/92 and surplus since 2002 driven primarily by global aggregate demand shocks.
  - U.S. current account deterioration since 2000 appears driven primarily by global aggregate demand shocks.

---

### VI. KEY CONCLUSIONS AND POLICY-RELEVANT IMPLICATIONS
- Non-oil trade balances play a central role in international transmission of oil shocks and help explain cross-country differences (notably between the United States and other oil-importing economies).
- Valuation effects (capital gains and losses) are important: can cushion or amplify trade and current account responses depending on asset ownership and currency valuation.
- Distinguishing between shock types (crude oil supply shocks; global aggregate demand shocks for industrial commodities; oil-market specific demand shocks such as precautionary demand) is crucial because effects differ qualitatively and quantitatively.
- International financial integration:
  - Provides risk sharing: ownership of oil assets by residents of oil-importing countries and foreign assets by oil producers provides insurance across price movements.
  - Affects distribution of adjustment burden: the United States may improve its NFA position in response to oil shocks, while other oil-importing economies may experience NFA losses under the same shocks.
- Implications for economic modeling:
  - Models should control for reverse causality and distinguish between shock types when analyzing oil price changes.
  - Trade in assets (valuation effects) should be incorporated; models treating oil prices as exogenous and ignoring asset valuation channels will be inconsistent with the data.
- Policy implication for recent external imbalances:
  - The widening U.S. current account imbalance can be explained to a large extent by cumulative demand and supply shocks in the crude oil market, with global aggregate demand shocks playing a significant role in recent years.

*Source: Excerpted content from _wp07110 (IMF Working Paper PDF).*

### References........................................................................................................21

### I. INTRODUCTION

### Research motivation and gaps in the literature
- Large literature on macroeconomic impact of oil-price shocks focuses on real economic growth and consumer price inflation in oil-importing countries (see Barsky and Kilian (2004) and Hamilton (2005) for recent reviews).
- Much smaller literature has studied the impact of oil price shocks on external accounts (examples: Bruno and Sachs (1982), Ostry and Reinhart (1992), Gavin (1990, 1992)).
- Policy premise: oil price shocks are thought to have large and often harmful effects on external accounts, forcing countries to borrow from abroad to offset adverse terms-of-trade shocks.
- Alternative concern: insufficient international risk sharing may mean external imbalances are not large enough to cushion domestic impacts of oil price shocks.
- Recent developments: changes in the crude oil market and large global external imbalances have renewed interest in the role of oil prices in determining external balances (see Rebucci and Spatafora 2006).

### Scope and contributions of the paper
- Provides a comprehensive analysis of the effects of oil price shocks on external balances during 1975–2004.
- Uses new data sets and methodologies not previously available to document dynamic effects of demand and supply shocks in the crude oil market on external balances.
- Examines changing importance of these shocks over time using historical decompositions.

### Departures from earlier studies
- Longer time span and more oil price shock episodes than previous studies.
- Greater disaggregation of external accounts:
  - Differentiates between the oil-trade balance and the non-oil trade balance, highlighting the role of the non-oil trade balance in offsetting oil trade deficits.
  - Considers effects on the valuation of net foreign assets (NFA), including capital gains and losses.
- Multilateral perspective:
  - Moves beyond selected oil-importing industrialized economies to include Japan, the United States, oil-importing middle-income economies, OPEC members, and a broader aggregate of oil-exporting economies.
  - Enables comparison of responses across regions and types of economies.
- Methodological improvements:
  - Exploits advances in measurement of shocks in the oil market (see Kilian 2006c).
  - Controls for reverse causality from global macroeconomic aggregates to the price of oil.
  - Differentiates between oil price changes driven by crude oil supply shocks, changes in precautionary demand for crude oil, and innovations to the global demand for industrial commodities.

### Main results and interpretive insights
- Trade balance effects:
  - The overall effect of oil shocks on the trade balance depends critically on the response of the non-oil trade balance.
  - Responses differ systematically between the United States and other oil-importing countries.
  - Responses of middle-income oil-importing economies do not differ systematically from those of the Euro area or Japan.
- Valuation effects on NFA:
  - Using the Lane and Milesi-Ferretti (2006) NFA data set, the paper documents valuation effects in response to oil shocks for the United States, other oil-importing economies, and oil exporters.
  - Valuation effects can be large and systematic, but for oil-importing countries they are generally difficult to interpret without a fully articulated economic model because they depend on:
    - Cross-ownership of assets among oil-importing economies.
    - Relative responses of oil-importing countries’ currencies and asset prices.
  - Capital gains and losses play an important role for net foreign asset dynamics, particularly in response to oil demand shocks.
  - Degree of financial integration matters:
    - Increased international financial integration tends to cushion the effect of oil shocks on NFA positions for major oil exporters and for the United States.
    - Increased international financial integration may amplify the effect for other oil importers.

### Organization of the paper
- Section 2 discusses mechanisms by which oil price fluctuations are expected to drive external balances and emphasizes the limited applicability of frameworks that assume oil price shocks are exogenous.

*Source: _wp07110 - References (excerpt) — Introduction and summary of contributions and main results*

### Section 3 describes the econometric methodology used in this study. Section 4 discusses the

### _wp07110 - Section 3 describes the econometric methodology used in this study. Section 4 discusses the

### II. THEORETICAL BACKGROUND
- Literature frames oil-price shock responses in two limiting cases: financial autarky and perfect capital mobility.
- Under financial autarky: external current-account imbalances cannot emerge in response to oil price shocks.
- Under perfect capital mobility: 
  - A temporary oil-price shock → no internal adjustment and a purely transitory flow imbalance.
  - A permanent oil-price shock → full internal adjustment (which may be costly and potentially smoothed or delayed, producing external imbalances).
- Two channels of external adjustment:
  - Trade (macroeconomic) channel: changes in quantities and prices of exported/imported goods; oil price increase (all else equal) lowers real income in oil importers, leads to expenditure/investment curtailment, currency depreciation for importers and appreciation for exporters, and at least temporary fall in real output for importers.
  - Financial (valuation) channel: changes in external portfolio positions and asset prices; can cushion or exacerbate external balance effects depending on portfolio configurations and asset price responses; bond and equity prices and exchange rates typically respond faster than goods prices and quantities.
- Limitations of standard theoretical frameworks:
  - They often treat oil prices as exogenous to the global economy; however, global macroeconomic fluctuations influence crude oil prices.
  - They typically do not distinguish between demand and supply shocks in the crude oil market; demand and supply shocks have qualitatively and quantitatively different macroeconomic effects.
- Empirical implication: need a structural model of oil prices that distinguishes supply shocks, aggregate demand shocks for industrial commodities, and oil-market specific demand shocks (precautionary demand).

### III. EMPIRICAL METHODOLOGY — Overview
- Two main steps:
  1. Trace fluctuations in the real price of crude oil to underlying demand and supply shocks in the crude oil market.
  2. Empirically assess responses of external accounts of selected countries and country groups to the identified demand and supply shocks.
- If the identified shocks are predetermined relative to macro aggregates and external accounts, standard regression methods can estimate dynamic responses and historical contribution of shocks.

### III.A. Construction of the Demand and Supply Shocks in the Crude Oil Market
- Identification strategy follows Kilian (2006c).
- Estimate a structural VAR model on monthly data for the vector z_t consisting of:
  - percent change in global crude oil production,
  - a measure of global real economic activity in industrial commodity markets,
  - the real price of crude oil.
- VAR model allows for two years’ worth of lags.
- Structural VAR representation: equation (1) with tε the vector of serially and mutually uncorrelated structural innovations; identification imposed via exclusion restrictions on A0−1.
- Three structural shocks attributed to fluctuations in real oil price:
  1. ε1t — oil supply shock (global supply of crude oil).
  2. ε2t — aggregate demand shock (shocks to global demand for industrial commodities including crude oil).
  3. ε3t — oil-market specific demand shock (precautionary demand for crude oil), constructed to be orthogonal to the other shocks.
- Core identifying assumptions (following Kilian 2006c):
  1. Crude oil production will not respond to oil demand shocks within the month.
  2. Increases in the real price of oil driven by oil-market specific demand shocks will not lower global real economic activity in industrial commodity markets within the month.
  3. Innovations to the real price of oil not explained by oil supply shocks or aggregate demand shocks are oil-market specific demand shocks.
- Implication: a recursively identified structural system where the real price of oil responds differently to each shock:
  - Oil-market specific demand → immediate and persistent increase in the real price of oil.
  - Aggregate demand for industrial commodities → delayed but sustained increase in the real price of oil.
  - Oil supply disruption → transitory increase in the real price of oil within the first year.
- Historical decomposition (using fitted values of model (1)):
  - Decompose real oil price fluctuations into cumulative effects of each shock type up to each date.
  - Major oil price surges typically driven by a combination of aggregate demand shocks and precautionary (oil-market specific) demand shocks rather than oil supply shocks.
  - Example: the increase after 2003 was driven entirely by cumulative effects of positive global demand shocks.
- Monthly-to-annual aggregation for use with annual external account data:
  - Annual shocks constructed as averages of monthly structural innovations:
    - ζ̂_{j,t} = 1/12 ∑_{i=1}^{12} ε̂_{j,t,i}, for j = 1,...,3.
  - Although z_t data extend back to 1973, estimating the VAR loses two years of observations; the resulting annual shock series extends back only as far as 1975.

### III.B. Estimation of the Dynamic Effects
- Let y_t denote a stationary macro aggregate (e.g., share of trade balance in GDP).
- Treat shocks ζ̂_{j,t} (j = 1,...,3) as predetermined with respect to y_t (pre-determinedness rules out feedback from y_t to ζ̂_{j,t} within a given year).
- Regression framework (equation (2)):
  - y_{t+h} = ψ_{h} ζ̂_{j,t} + δ + Σ_{i=1}^{h} ... + u_t  (model (2) form as in text), where u_t is potentially serially correlated and ζ̂_{j,t} serially uncorrelated.
  - Impulse response defined as dy_{t+1}/dζ̂_{j,t}; estimated via parameters ψ_{h}.
- Practical choices and considerations:
  - Maximum horizon of impulse responses set to five years.
  - Equation-by-equation (parsimonious) approach used under premise that annual shocks ζ̂_{j,t} are mutually uncorrelated.
  - Contemporaneous correlation of annual shocks reported in Table 1 ranges between -2 and 11 percent; treated as sufficiently low to estimate separate equations for each shock.
- Alternative approaches considered but not adopted:
  - Estimating model (2) including current and lagged values of all shocks — impractical given short external balances sample and need for five lags per shock.
  - Fitting a recursively identified VAR to (y_t, ζ̂_{1,t}, ζ̂_{2,t}, ζ̂_{3,t})′ with high lag order — produced counterintuitive or highly lag-sensitive estimates, likely overfitting.
  - Adding lagged dependent variables to model (2) — would require strict exogeneity of ζ̂_{j,t} with respect to y_t, deemed not viable here.

### IV. DATA
- Six measures of external balance considered:
  1. Change in Net Foreign Assets ≡ Current Account + Capital Gains
  2. Current Account ≡ Merchandise Trade Balance + Service Trade Balance + Income Balance
  3. Merchandise Trade Balance ≡ Oil Trade Balance + Non-Oil Merchandise Trade Balance
  4. Oil Trade Balance
  5. Non-Oil Merchandise Trade Balance
  6. Capital Gains on Gross Foreign Assets and Liabilities
- Trade balance refers to merchandise trade balance (services excluded because of data availability and quality concerns).
- Income balance excluded from some analyses because it is difficult to interpret without detailed asset position information and cannot be measured accurately; income balance cannot be separated from transfer payments even when services data are available.
- Data sources:
  - NFA data from Lane & Milesi-Ferretti (2006).
  - All other data (including trade balance, current account, and GDP data) from the IMF’s World Economic Outlook database.
- Sample coverage and frequency considerations:
  - Shocks are measured monthly; external account data are typically annual → annual aggregation of monthly shocks as described above.
  - The annual shock series begins in 1975 due to loss of two years in VAR estimation despite monthly data existing from 1973.

*Italic: Source content from the provided IMF PDF excerpt.*

### 1. Oil exporters

### 1. Oil exporters

### Major oil exporters
- OPEC
- Canada and UK

### High-income oil-importing economies
- United States
- Euro Area
- Japan

*Source: _wp07110 - 1. Oil exporters (https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07110.pdf)*

### 3. Middle-income oil-importing economies

### 3. Middle-income oil-importing economies

### Definitions and data
- Middle-income economies: developing countries that lie above the median of the PPP-weighted GDP per capita of the sample of all developing economies excluding China and India.
- Sample period for fuel-export classification: 1970–2005.
- Major oil exporter: average share of fuel exports in total exports over 1970–2005 is at least 20 percent.
- Fuel exports include petroleum products, natural gas and coal.
- OPEC is a subset of major oil exporters; the list of OPEC countries excludes Iraq because of NFA data availability.
- External accounts are expressed in current dollars and normalized by nominal GDP; group shares in GDP are computed by aggregating across countries and normalizing by the sum of GDP in current dollars to net out intra-group imbalances.
- China and India are excluded from the middle-income sample; low-income countries are not reported due to poor quality external accounts data.
- The United States, Japan, and the Euro Area are examined individually in the analysis.

### Methodology and estimation
- Regression model (2) is estimated for each of the 54 dependent variables defined in section 4.
- Oil shocks ˆζ_jt (j = 1,...,3) are treated as predetermined with respect to the dependent variable.
- Impulse responses (Figures 4–12) are normalized so a given shock implies an increase in the real price of oil; results are expressed as a share of GDP.
- One-standard-error and two-standard-error bands for impulse responses are constructed using a block bootstrap method that allows for serially correlated error terms (Berkowitz, Birgean and Kilian 1999).
- Historical decompositions simulate counterfactual paths setting a given demand or supply shock to zero throughout the sample to measure cumulative effects.

### Impulse response general findings (across country groups)
- Any shock that raises the real price of oil will push a typical oil importer's oil trade balance into deficit; timing and magnitude depend on shock type.
- Positive aggregate demand shocks: oil trade deficit tends to emerge with delay.
- Oil-specific demand increases (precautionary demand) and negative oil supply shocks: immediate oil trade deficit; oil-specific demand increase is typically more sustained and larger than supply shocks.
- Non-oil trade balances often improve in response to oil-price-raising shocks and partially offset the oil trade deficit.
- Valuation effects (capital gains/losses) occur and can offset or amplify trade imbalances; their importance depends on international asset positions and currency movements.
- International financial integration can cushion or amplify the effects of oil shocks depending on ownership of assets and currency valuation responses.

### Oil exporters (summary)
- Oil trade balance: negative supply shocks or positive demand shocks in crude oil market generally improve oil exporters' oil trade balance; stronger and more significant for OPEC.
- Temporary nature of improvement consistent with falling export quantities as demand decreases.
- Canada and the U.K.: much smaller and largely statistically insignificant oil-trade balance responses, except for oil supply disruptions.
- Non-oil trade balance: tends to deteriorate for oil exporters after favorable oil shocks (increased oil prices/wealth increase demand for non-oil tradables); demand shocks cause significant medium-run deterioration, supply disruptions largely insignificant.
- Capital gains: oil-supply disruptions cause significant capital losses for oil exporters (column 5 Figures 4 and 5); these losses can offset current account improvements rendering change-in-NFA responses insignificant.
- For Canada and the U.K., capital losses from supply disruptions play a much less important role.

### High-income oil-importing economies (United States, Japan, Euro area)
- Oil trade balance: all types of oil shocks negatively impact oil trade balance; oil-specific demand increases cause immediate, persistent, highly significant deficits. Effect as share of GDP is smaller for the United States than for Japan or the Euro area.
- Non-oil trade balance: tends to improve in response to oil-price-raising shocks, with cross-country differences:
  - Euro area: evidence of significant non-oil trade surplus in response to adverse oil supply shocks.
  - U.S.: unanticipated aggregate demand increases associated with delayed but significant non-oil trade surplus; non-oil trade balance increases significantly in response to oil-specific demand shocks (with delay).
  - Japan: similar to U.S. in responses to oil-specific demand shocks.
- Trade balance (net effect): differs across countries:
  - U.S.: positive aggregate demand shock causes initial trade deficit then significant surplus after three years; some evidence of surplus in response to oil-specific demand increases.
  - Other advanced economies: oil-specific demand increases cause immediate, persistent, highly significant trade deficits; aggregate demand expansions cause temporary trade deficits with ~two-year delay.
- Capital gains (valuation effects):
  - U.S.: significant short-run capital gains followed by significant capital losses in years 3 and 4 in response to aggregate demand shocks.
  - Euro area and Japan: roughly mirror U.S. response (mirror-image pattern).
  - Oil supply disruptions: small negative, statistically insignificant capital-gain responses across U.S., Euro area, Japan.
  - Precautionary oil-demand increase: initial capital loss, followed by significant capital gain in years 3 and 4.
  - Valuation effects can dampen impacts for the U.S. and oil exporters, but can magnify impacts for the Euro area and Japan.
- Current account and change in NFA:
  - U.S. NFA position: does not change significantly in response to oil supply shock; may improve with some delay in response to oil-market specific demand increases; temporary improvement in U.S. NFA in response to positive aggregate demand shocks but preceded by current account deficit.
  - Other advanced oil importers: tend to experience current account deficits and reductions in NFA in response to the same shocks (declines not always statistically significant).

### Middle-income oil-importing economies (detailed)
- Oil trade balance: systematically falls in response to shocks that raise the price of oil:
  - Responses to oil supply disruptions and oil-specific demand increases: highly significant.
  - Response to aggregate demand shocks: marginally significant.
- Non-oil trade balance:
  - Response to oil supply disruption: negative (not precisely estimated).
  - Response to positive aggregate demand shock: positive and statistically significant.
  - Response to oil-specific demand shock: not statistically different from zero.
- Overall trade balance:
  - Aggregate demand shock raising real oil price: marginally significant improvement on impact.
  - Oil supply disruptions and precautionary demand increases: significant deterioration of overall trade balance.
  - Non-oil trade balance responses partially offset oil-trade balance, similar to advanced oil-importing economies.
- Valuation effects:
  - Statistically significant capital loss after the second year in response to a positive aggregate demand shock and a significant capital gain in years 3 and 4 (qualitatively similar to Euro area and Japan; roughly mirror image of U.S. response).
  - Responses of capital gains to oil supply disruptions and oil-specific demand increases largely statistically insignificant.
- Current account:
  - Deteriorates significantly in response to oil supply disruptions and to an increase in oil-specific demand.
  - For supply disruptions: driven mainly by trade balance.
  - For oil-specific demand shocks: driven by trade balance and exacerbated by net effect of income payments, transfers, and trade in services.
  - Response to positive aggregate demand shock: significantly positive on impact, then turns significantly negative subsequently.
- Net foreign assets (NFA):
  - Deteriorate in all cases and in some cases significantly.
  - Timing of decline appears driven primarily by valuation effects rather than current account.

### Latin America versus Emerging Asia (within middle-income group)
- Both groups: oil trade balance shows negative response to all three shocks.
- Non-oil trade balance:
  - Oil supply disruptions: more negative on impact in Latin America.
  - Oil-demand shocks: less pronounced response in Latin America.
  - Emerging Asia: decline in non-oil trade balance in year 3 consistent with decline of U.S. real GDP after aggregate demand increases due to export orientation.
- Overall trade balance: Emerging Asia experiences a more significant overall trade deficit in response to oil-specific demand increases than Latin America.
- Current account: deteriorates more in Emerging Asia owing to non-oil trade balance.
- Interpretation: Latin America’s limited access to international capital markets may have discouraged borrowing in response to oil demand shocks.
- Capital gains/losses:
  - Latin America: little evidence of significant capital gains or losses in response to oil shocks (consistent with limited exchange-rate flexibility and currencies depreciating less than the U.S. dollar during much of the sample).
  - Emerging Asia: marginally significant capital loss after two years and statistically significant large capital gain after three years in response to positive aggregate demand shocks; no significant responses to other shocks.

### Historical decompositions
- The model tracks major shifts in external accounts (e.g., rapid NFA accumulation by OPEC after 1999; growing U.S. current account deficit since late 1990s).
- Relative importance of individual demand and supply shocks can change drastically across episodes.
- Examples:
  - OPEC current account deficit of 1998 associated with temporary drop in oil-specific demand following the Asian crisis of 1997.
  - OPEC current account deficit of 1991/92 and the current account surplus since 2002 driven primarily by global aggregate demand shocks.
  - Deterioration of the U.S. current account since 2000 appears driven primarily by global aggregate demand shocks.

### Key conclusions and policy-relevant implications
- Non-oil trade balances play a central role in the international transmission of oil shocks and help explain differences across economies (notably between the United States and other oil-importing economies).
- Valuation effects (capital gains and losses) are important: they can either cushion or amplify trade and current account responses to oil shocks depending on asset ownership and currency valuation.
- Distinguishing between types of oil shocks (crude oil supply shocks, global aggregate demand shocks for industrial commodities, oil-market specific demand shocks such as precautionary demand) is crucial because these shocks have qualitatively and quantitatively different effects on the real price of oil and on external accounts.
- International financial integration has two roles:
  - Risk sharing: ownership of oil assets by residents of oil-importing countries and foreign assets by oil producers provides insurance across price movements.
  - Distribution of adjustment burden: the United States occupies a unique position where its NFA position may improve in response to oil shocks, whereas other oil-importing economies may experience NFA losses under the same shocks.
- Implications for economic modeling:
  - Models should control for reverse causality and distinguish between shock types when analyzing oil price changes.
  - Trade in assets (valuation effects) should be incorporated; models treating oil prices as exogenous and ignoring asset valuation channels will be inconsistent with the data.
- Policy implication for recent external imbalances:
  - The widening U.S. current account imbalance can be explained to a large extent by cumulative demand and supply shocks in the crude oil market, with global aggregate demand shocks playing a significant role in recent years.

*Source: _wp07110 - 3. Middle-income oil-importing economies*

### References

### _wp07110 - References

### Key references
- Barsky, R.B., and L. Kilian, 2002, “Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative,” in NBER Macroeconomics Annual 2001, ed. by B.S. Bernanke and K. Rogoff, (Cambridge, Massachusetts: MIT Press), pp. 137–83.
- Barsky, R.B., and L. Kilian, 2004, “Oil and the Macroeconomy Since the 1970s,” Journal of Economic Perspectives, Vol. 18, No. 4, pp. 115–34.
- Berkowitz, J., I. Birgean, and L. Kilian, 1999, “On the Finite-Sample Accuracy of Nonparametric Resampling Algorithms for Economic Time Series,” in Advances in Econometrics: Applying Kernel and Nonparametric Estimation to Economic Topics ed. by T.B. Fomby and C. Hill, Vol. 14, (Connecticut: JAI Press), pp. 77–107.
- Bodenstein, M., C.J. Erceg, and L. Guerrieri, 2006, “Oil Shocks and U.S. External Adjustment,” (unpublished; Federal Reserve Board).
- Bruno, M., and J. Sachs, 1982, “Energy and Resource Allocation: A Dynamic Model of the Dutch Disease,” Review of Economic Studies, Vol. 49, pp. 845–59.
- Cooley, T.F., and S. LeRoy, 1985, “Atheoretical Macroeconometrics: A Critique,” Journal of Monetary Economics, Vol. 16, pp. 283–308.
- Engle, R.F., D.F. Hendry, and J. F. Richard, 1983, “Exogeneity,” Econometrica, Vol. 51, pp. 277–304.
- Gavin, M., 1990, “Structural Adjustment to a Terms of Trade Disturbance: The Role of Relative Prices,” Journal of International Economics, Vol. 28, pp. 217–43.
- Gavin, M., 1992, “Income Effects of Adjustment to a Terms of Trade Disturbance and the Demand for Adjustment Finance,” Journal of Development Economics, Vol. 37, pp. 127–53.
- Ghironi F., J. Lee, and A. Rebucci, 2006, “The Valuation Channel of External Adjustment,” NBER Working Paper (Cambridge, Massachusetts), forthcoming.
- Gonçalves, S., and L. Kilian, 2004, “Bootstrapping Autoregressions with Conditional Heteroskedasticity of Unknown Form,” Journal of Econometrics, Vol. 123, pp. 89–120.
- Gourinchas, P. O., and H. Rey, 2006, “International Financial Adjustment,” NBER Working Paper No. 11155, (Cambridge, Massachusetts).
- Hamilton, J.D., 2003, “What is an Oil Shock?” Journal of Econometrics, Vol. 113, pp. 363–98.
- Hamilton, J.D., 2005, “Oil and the Macroeconomy,” forthcoming in The New Palgrave Dictionary of Economics, ed. by S. Durlauf and L. Blume, (London: Macmillan, 2006, 2nd ed). Available at: http://dss.ucsd.edu/~jhamilto/JDH_palgrave_oil.pdf
- Kilian, L., 2006a, “The Effects of Exogenous Oil Supply Shocks on Output and Inflation: Evidence from the G7 Countries,” (unpublished; Department of Economics, University of Michigan). Available at: http://www-personal.umich.edu/~lkilian/paperlinks.html
- Kilian, L., 2006b, “Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy?” forthcoming in Review of Economics and Statistics. Available at: http://www-personal.umich.edu/~lkilian/paperlinks.html.
- Kilian, L., 2006c, “Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market,” (unpublished; Department of Economics, University of Michigan). Available at: http://www-personal.umich.edu/~lkilian/paperlinks.html
- Lane, P., and G.M. Milesi-Ferretti, 2006, “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004,” forthcoming: IMF Working Paper, (Washington: International Monetary Fund).
- Ostry, J., and C. Reinhart, 1992, “Private Saving and Terms of Trade Shocks: Evidence from Developing Countries,” Staff Papers, International Monetary Fund, Vol. 9, pp. 495–517.
- Rebucci, A., and N. Spatafora, 2006, “Oil Prices & Global Imbalances,” in IMF World Economic Outlook April 2006: Globalization and Inflation, Chapter II, (Washington: International Monetary Fund), pp. 71–96.
- Sen, P., 1994, “Savings, Investment, and the Current Account,” in The Handbook of International Macroeconomics, ed. by van der Ploeg.

### Data appendix — A. Variable list
- Gross domestic product, current prices, U.S. dollars  
  - Units/Scale: Billions of US dollars  
  - Variable name: gdp  
  - Source: IMF World Economic Outlook

- Net external position  
  - Units/Scale: Millions of US dollars  
  - Variable name: nfa  
  - Source: Lane/Milesi-Ferreti

- Net foreign assets as a share of GDP  
  - Calculation: (nfa /1000) / gdp) * 100  
  - Units/Scale: Percent of GDP  
  - Variable name: nfa_gdp  
  - Source: Lane/Milesi-Ferreti, IMF World Economic Outlook

- Current account balance  
  - Units/Scale: Billions of US dollars  
  - Variable name: ca  
  - Source: IMF World Economic Outlook

- Current account balance as a share of GDP  
  - Calculation: (ca /gdp) * 100  
  - Units/Scale: Percent of GDP  
  - Variable name: ca_gdp  
  - Source: IMF World Economic Outlook

- Trade balance for goods  
  - Units/Scale: Billions of US dollars  
  - Variable name: tb  
  - Source: IMF World Economic Outlook

- Trade balance as a share of GDP  
  - Calculation: (tb /gdp) * 100  
  - Units/Scale: Percent of GDP  
  - Variable name: tb_gdp  
  - Source: IMF World Economic Outlook

- Oil trade balance  
  - Units/Scale: Billions of US dollars  
  - Variable name: tbo  
  - Source: IMF World Economic Outlook

- Oil trade balance as a share of GDP  
  - Calculation: (tbo/gdpd) * 100  
  - Units/Scale: Percent of GDP  
  - Variable name: tbo_gdp  
  - Source: IMF World Economic Outlook

- Non-oil trade balance  
  - Calculation: tb-tbo  
  - Units/Scale: Billions of US dollars  
  - Variable name: tbno  
  - Source: IMF World Economic Outlook

- Non-oil trade balance as a share of GDP  
  - Units/Scale: Percent of GDP  
  - Variable name: tbno_gdp  
  - Source: IMF World Economic Outlook

- Change in NFA over the previous year  
  - Calculation: nfa t - nfa t-1  
  - Units/Scale: Millions of US dollars  
  - Variable name: dnfa  
  - Source: Lane/Milesi-Ferreti

- Change in NFA as a share of GDP  
  - Calculation: ((dnfa/1000) / gdp) * 100  
  - Units/Scale: Percent of GDP  
  - Variable name: dnfa_gdp  
  - Source: Lane/Milesi-Ferreti, IMF World Economic Outlook

- Capital gains as defined by the difference between the change in NFA and the current account balance  
  - Calculation: (dnfa/1000) – ca  
  - Units/Scale: Billions of US dollars  
  - Variable name: capgain  
  - Source: Lane/Milesi-Ferretti, IMF World Economic Outlook

- Capital gains as a share of GDP defined by the difference between the change in NFA and the current account balance divided by GDP  
  - Calculation: (capgain/gdp) * 100  
  - Units/Scale: Percent of GDP  
  - Variable name: capgain_gdp  
  - Source: Lane/Milesi-Ferretti, IMF World Economic Outlook

### Data appendix — B. Country groupings
- Fuel exporters (26): Algeria, Angola, Azerbaijan, Bahrain, Brunei, Congo (Rep. of), Ecuador, Gabon, Indonesia, Iran, Kazakhstan, Kuwait, Libya, Mexico, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, Syria, Trinidad and Tobago, Turkmenistan, United Arab Emirates, Venezuela, Yemen.
- OPEC (10): Algeria, Indonesia, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela.
- Canada and UK (listed together as a grouping)
- United States (listed as a separate grouping)
- Japan (listed as a separate grouping)
- Euro Area (12): Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain.
- Middle-Income Economies (46): Albania, Argentina, Belarus, Bosnia and Herzegovina, Botswana, Brazil, Bulgaria, Chile, Colombia, Costa Rica, Croatia, Czech Republic, Dominican Republic, Equatorial Guinea, Estonia, Fiji, Hong Kong, Hungary, Jordan, Korea, Latvia, Lebanon, Lithuania, Macedonia, Malaysia, Malta, Mauritius, Namibia, Panama, Paraguay, Peru, Philippines, Poland, Romania, Singapore, Slovak Republic, Slovenia, South Africa, Swaziland, Taiwan, Thailand, Tunisia, Turkey, Ukraine, Uruguay, Yugoslavia.
- Emerging Asia (7): Hong Kong, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand.
- Latin America (10): Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Panama, Paraguay, Peru, Uruguay.

### Tables — key reported correlations and notes
- Table 1: Correlations of Demand and Supply Shocks in Crude Oil Market Aggregated to Annual Frequency 1975-2004  
  - Matrix entries:  
    - Oil Supply Shock vs Oil Supply Shock: 1  
    - Oil Supply Shock vs Aggregate Demand Shock: -0.02  
    - Oil Supply Shock vs Oil-Specific Demand Shock: 0.11  
    - Aggregate Demand Shock vs Aggregate Demand Shock: 1  
    - Aggregate Demand Shock vs Oil-Specific Demand Shock: -0.08  
    - Oil-Specific Demand Shock vs Oil-Specific Demand Shock: 1  
  - NOTES: The oil shocks are obtained from model (1) as described in the text.

- Table 2: Correlations of the Innovations of External Balances (as a Percent Share of GDP) with Oil Shocks — United States  
  - Share in GDP correlations with shocks:  
    - Change in NFA: Oil Supply 0.06; Aggregate Demand -0.08; Oil-Specific Demand 0.13  
    - Current Account: Oil Supply 0.03; Aggregate Demand -0.13; Oil-Specific Demand -0.19  
    - Trade Balance: Oil Supply -0.04; Aggregate Demand 0.04; Oil-Specific Demand -0.10  
    - Oil Trade Balance: Oil Supply 0.01; Aggregate Demand -0.31; Oil-Specific Demand -0.49  
    - Non-Oil Trade Balance: Oil Supply -0.15; Aggregate Demand 0.19; Oil-Specific Demand 0.27  
    - Income Balance: Oil Supply 0.20; Aggregate Demand -0.05; Oil-Specific Demand 0.18  
    - Capital Gain: Oil Supply -0.17; Aggregate Demand 0.15; Oil-Specific Demand 0.18  
  - NOTES: The innovations are estimated as the residuals of AR(2) models for each of the external balance measures. The oil shocks are obtained from model (1) as described in the text.

### Figures — captions and notes (selected)
- Figure 1: Responses to One-Standard Deviation Structural Shocks — OLS Point Estimates with One and Two-Standard Error Bands  
  - NOTES: Estimates based on restricted VAR(24) system described in text. The confidence intervals were constructed using a recursive-design wild bootstrap (see Gonçalves and Kilian 2004).

- Figure 2: Historical Decomposition of Real Price of Oil 1975.2-2005.9  
  - NOTES: See Figure 1.

- Figure 3: Annual Averages of the Shocks that Determine the Real Price of Oil — Estimates for 1975-2004  
  - NOTES: Annual averages of the structural shocks underlying the responses in Figure 1.

- Figures 4–12: Dynamic Responses of External Accounts as a Share of GDP for various country groups and regions, including Oil Exporters, OPEC, Canada and UK, United States, Euro Area, Japan, Middle-Income Economies, Emerging Asia, Latin America.  
  - Each figure shows dynamic responses (over 0, 2, 4 years) of variables such as Change in NFA, Current Account, Trade Balance, Oil trade balance, Non-Oil trade balance, Capital Gain to Oil Supply Shock, Aggregate Demand Shock, and Oil-Specific Demand Shock.

- Figure 13: Historical Decompositions of Selected External Accounts as a Share of GDP — Cumulative Effect / Actual for groups including Oil Exporters, OPEC, USA, Euro Area, Japan, Middle Income Economies.

- Figure 14: Historical Decompositions of the Current Account as a Share of GDP — Cumulative Effect / Actual (panels for USA and OPEC, showing Oil Supply Shocks, Aggregate Demand Shocks, Oil-Specific Demand Shocks).

*Source: _wp07110 - References (PDF).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07110.pdf_