Macroeconomic Impacts of Oil Price Fluctuations in a Trade Linked Case

Abstract

This research evaluates the impact of oil price shocks on oil producing and consuming economies; we used a simultaneous equation framework for differ- ent economies with business relations. As expected, we found that oil producers (in this study, Iran and the Russian Federation) benefit from oil price shocks. However contrary to previous findings, they also benefit from the indirect effect through their trade partners. For oil-consuming economies, the effects are more diverse. In some economies, output falls in response to an oil price shock, while some others seem to be immune. Generally, those economies that trade more with oil producers gain indirect benefits via higher demand from oil producers. For instance, the Netherlands, Germany, France, Italy, the United States, the United Kingdom, and the People’s Republic of China get negative direct effects and positive indirect effects from oil producing economies. This is exactly the result that we anticipated. India has both negative effects directly and indirectly and seems to suffer more in a positive oil price shock. For Japan, Spain, Switzerland, and Turkey the results are reversed. They benefit from an oil shock directly and indirectly.