96/05831 Long-term relationships among oil production, oil price, and major macroeconomic variables: Evidence from the United Kingdom, 1981-1991

Abstract

This paper reports the results of cointegration analysis applied to structural economic causality equations. By using data for oil production, the price of oil, the current account, real exchange rate, capital stock, nonoil output, manufacturing output, and gross domestic product growth for the U.K. economy, the validity of long-term relationships in the sense of Granger among these major macroeconomic aggregates is investigated. For the period of the first quarter of 1981 to the fourth quarter of 1991, the empirical evidence presented indicates that the latter six macrovariables are I(1) in the level, and oil production and oil prices, while not being significantly related to one another, are significantly cointegrated with the current account, real exchange rate, capital stock, nonoil output, and economic growth. However, our results suggest no long-term relationship among oil production, the price of oil, and manufacturing output. These findings provide support for the adoption, from a macroeconomic modeling perspective, of a conceptual framework that emphasizes the long-term nature of the adjustment process, in order to be applicable for an analysis of oil-related developments in the United Kingdom.