Granger Predictability of Oil Prices After the Great Recession

IMF Working Papers, November 1, 2019

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Real oil prices surged from 2009 through 2014, comparable to the 1970’s oil shock period.
Standard explanations based on monopoly markup fall short because inflation remained low after 2009.
The paper provides strong evidence of Granger (1969) predictability of nominal factors to oil prices.
Granger predictability from standard monetary aggregates is found only after one specific adjustment: subtracting the 2008-2009 Federal Reserve borrowing of reserves from other Central Banks (Swaps) that was made after US reserves turned negative.

Single critical adjustment:
- Subtract the 2008-2009 Federal Reserve Swaps (borrowing of reserves from other Central Banks) from monetary aggregates.
The adjustment is described as key to uncovering Granger predictability of nominal monetary factors for oil prices.

The surge in real oil prices during 2009–2014 cannot be fully explained by monopoly markup theories given the low inflation environment after 2009.
Nominal monetary factors, when measured with the Swaps adjustment, have predictive power for oil prices in Granger causality tests.

Subjects: Consumer price indexes, Gold prices, Inflation, Monetary base, Money, Oil prices, Prices
Keywords: Consumer price indexes, CPI Granger, E510, E520, excess reserves, expectations Granger, EXPMICH inflation expectations variable, Gold prices, Granger predictability, Inflation, inflation expectation, inflation expectations Granger, long term inflation expectations Granger, longer term inflation expectations Granger, M1 Divis-SWP, Monetary base, Oil prices, predictability CPI inflation, Q43, sub, WP, WTI price

Szilard Benk and Max Gillman, November 1, 2019 — IMF Working Paper: Granger Predictability of Oil Prices After the Great Recession.