Empirical Research on the Interaction Between Oil Price Shock and World Economic Activity

Abstract

Although the research on the relation between oil price shock and economic growth have emerged in a large amount since the 1970s, there has been little empirical research on the interaction between oil price shock and world economic activity. In this paper, the unit roots test with two structural breaks and VAR model are used to study the interaction from the first quarter of 1970 to the fourth quarter of 2007. The empirical results indicate: the oil price and world GDP series are both nonstationary with two structural breaks and their interaction is remarkably different in different phases. The response of oil price to world economy is stronger than the opposite one and there is no cointegration relationship. There exists significantly bidirectional causal relationship in the first and fourth phases. The contribution of oil price to the variance decomposition of world economy occupies only a small proportion in all phases. But the contribution of world economy to the variance decomposition of oil price surpasses its own after periods in the second and fourth phases. Overall, the interaction between oil price and world economy changes along with different phases.