News shocks in open economies: Evidence from giant oil discoveries

Abstract

This article explores the effect of news shocks in open economies using worldwide giant oil and gas discoveries as a directly observable measure of news shocks about future output-the delay between a discovery and production is on average four to six years. We first analyze the effects of a discovery in a two-sector small open economymodel with a resource sector.We then estimate the effects of giant oil and gas discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil or gas discovery, the current account and saving rate decline for the first five years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, whereas GDP does not increase until after five years. Employment rates fall slightly and remain low for a sustained period.