Oil, Gas, or Financial Conditions-Which One Has a Stronger Link with Growth?

Abstract

Using the models of Diebold-Yilmaz (2012) and Barunik and Krehlik (2018) and monthly U.S. data from January 1992 to May 2019 (329 observations), this study estimates the return and volatility connectedness transmitted from commodity markets (natural gas and crude oil) and the Kansas City financial stress index to macroeconomic indicators (GDP and CPI). As a research target, crude oil has received significant attention. Although natural gas plays an important role in the energy markets as an environment-friendly alternative, it has not been studied extensively. We find the different spread speed of shocks to return and volatility variables through the total spillover index. We focus on both crude oil and natural gas and find that after the bankruptcy of the Lehman Brothers on September 19, 2008, there was a significant jump in the total return spillover from 35.09% to 46.91%, peaking in October 2008. Furthermore, in the frequency domain, we find that the total long-term return spillover index had the highest proportion during the global financial crisis. When the total spillover is concentrated on the high frequencies, it means the system will have an impact mostly in the short term. When it is concentrated on the lower frequencies, it shows that shocks are persistent and works in the long term among the system. It could give some information to the policymakers.