News Shocks in Open Economies: Evidence from Giant Oil Discoveries
IMF Working Papers, September 29, 2015
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Bibliographic details
- Authors: Rabah Arezki, Valerie A Ramey, Liugang Sheng
- Published: September 29, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513543154.001
Research question and approach
- Explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output.
- Uses a two-sector small open economy model to predict responses of macroeconomic aggregates to news of an oil discovery.
- Empirically estimates the effects of giant oil discoveries on a large panel of countries; empirical estimates are consistent with the model's predictions.
Key timing and mechanism
- The delay between a discovery and production is on average 4 to 6 years.
- The paper interprets giant oil discoveries as news about future output that agents anticipate and respond to prior to production.
Principal empirical findings
- Current account and saving rate:
- Decline for the first 5 years after an oil discovery.
- Then rise sharply during the ensuing years.
- Investment:
- Rises robustly soon after the news arrives.
- GDP:
- Does not increase until after 5 years.
- Employment:
- Employment rates fall slightly for a sustained period of time.
Theoretical insights
- The two-sector small open economy model is used to generate predictions on how news of future resource wealth affects consumption, saving, investment, and external balances in an open-economy setting.
- The empirical results align with model predictions, illustrating anticipation effects and substitution effects in response to news shocks.
Subjects and keywords (as listed)
- Subjects: Balance of payments, Commodities, Consumption, Current account, Economic sectors, National accounts, Oil, Oil production, Oil sector, Production
- Keywords: account-GDP ratio, anticipation effect, Consumption, Current account, current account and business cycles, Global, investment-GDP ratio, Middle East, news shocks, North Africa, oil, oil discovery, Oil production, Oil sector, open economy, ratio decrease, saving-GDP ratio, substitution effect, WP
News Shocks in Open Economies: Evidence from Giant Oil Discoveries — By Rabah Arezki, Valerie A Ramey, Liugang Sheng, September 29, 2015.