Structural oil price shocks and policy uncertainty

Abstract

Increases in the real price of oil not explained by changes in global oil production or by global real demand for commodities are associated with significant increases in economic policy uncertainty and its four components (the volume of newspaper coverage of policy uncertainty, CPI forecast interquartile range, tax legislation expiration, and federal expenditures forecast interquartile range). Oil-market specific demand shocks account for 31% of conditional variation in economic policy uncertainty and 22.9% of conditional variation in CPI forecast interquartile range after 24months. Positive oil shocks due to global real aggregate demand for commodities significantly reduce economic policy uncertainty. Structural oil price shocks appear to have long-term consequences for economic policy uncertainty, and to the extent that the latter has impact on real activity the policy connection provides an additional channel by which oil price shocks have influence on the economy. As a robustness check, structural oil price shocks are significantly associated with economic policy uncertainty in Europe and energy-exporting Canada.