Abstract
This research aims to study the effects of oil price changes on the Colombian economy during 2001:Q1 to 2016:Q2. A structural vector auto-regression model in the spirit of Blanchard and Gali (2010) is estimated under a recursive identification scheme, where unexpected oil price variations are exogenous relative to the contemporaneous values of the remaining variables. Drawing on impulse-response estimates, a 10% increase in the oil price generates the following accumulated orthogonalized responses: i) a contemporaneous 0.4% increase in GDP growth, later on the effect reaches its maximum in the first quarter (1.7% increase) and starts to decay after two quarters; ii) a contemporaneous 1.2% decrease in unemployment, then the effect remains slightly negative and reaches its maximum after ten quarters (5.1% decrease); iii) a contemporaneous 0.9% decrease in inflation, followed by an 0.2% increase by quarter three, and thereafter the effect remains slightly negative.
Highlights
Oil is a key component of the global economy, and the relationship between its price and macroeconomic indicators has been addressed by economic researchers since the late 1970s, such as Hamilton (1983, 1996), Rotemberg and Woodford (1996), Kilian (2009), Blanchard and Galí (2010), among many others
A priori, given the importance of the oil sector in Colombia and considering the relevance of the country in terms of crude production, following oil price increases, there were expected an increase in GDP growth, a decline in the unemployment rate, and a slight decrease in the inflation rate
The following checks were performed: a) the absence of serial correlation was confirmed by means of the Lagrange-multiplier test; b) the model satisfied the stability condition, as all the roots of the companion matrix were inside the unit circle, i.e. less than one; c) the multivariate version of the Jarque-Bera test suggested the presence
Summary
Oil is a key component of the global economy, and the relationship between its price and macroeconomic indicators has been addressed by economic researchers since the late 1970s, such as Hamilton (1983, 1996), Rotemberg and Woodford (1996), Kilian (2009), Blanchard and Galí (2010), among many others. Most of the research on the subject has focused on advanced economies (especially the U.S.), which have been historically net-importers of oil. For emerging and developing economies, the effects of oil price fluctuation have been explored to a much lesser extent in recent work, for example by Lorde, Jackman and Thomas (2009) for Trinidad and Tobago, and Farzanegan & Markwardt (2009) for Iran. Previous work has presented a variety of results, which suggest that the responses to oil price fluctuations might be heterogeneous from one country to another, depending on the characteristics of the economy, including whether it is emerging or developed, a net oil-exporter or a net oil-importer. As stated previously, the majority of journal articles on this subject have been focused on the U.S or other industrialized economies, and to the best of my knowledge, the Colombian case has not been widely explored in the empirical macroeconomic literature. This work aims to make another contribution to the understanding of the oil prices-macroeconomy relationship, focusing on Colombia
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