Analyse the effects of oil price, Macroeconomics

Assignment Help:

As previously stated, the aim of the paper is to observe and analyse the effects of oil price shocks on key macroeconomic indicators in the UK economy. From this the aim is to conclude whether there is sufficient evidence of a relationship between oil price shocks and economic performance in the UK. Previous studies provided a sound basis and contributed to the initial understanding of this problem. Since the mid-2000s the UK has become a net importer of oil which further emphasised the need to carry out this study, as economic theory suggests that future oil price shocks would have a far greater negative impact on the macroeconomy than when the UK was a net exporter of oil. The most effective method of analysing this problem was to use an unconstrained VAR. From this we found the impulse response functions of the key macroeconomic indicators to a one standard deviation shock in the price of oil.The most interesting findings are described below.

The Granger Causality tests showed that at the 95% significance level, oil price granger caused GDP, inflation and interest rates. The importance of these findings is that theysuggest that any change in the oil price variable will induce further changes in these three variables.

Following on from the causality testing, the Cholesky impulse response functions were estimated. This part of the results is without doubt the most telling about the relationships between oil prices and the remaining variables. The three variables that are Granger caused by oil prices provided very interesting impulse responses. Firstly, as oil prices are a large component in calculating inflation, it was no surprise to observe that following a shock in the oil price, inflation rose sharply and it took five years for the level to revert back to its original level. A similar pattern emerged from the GDP impulse response to oil, although it's maximum and minimum were both within the first five quarters, a lot quicker than for inflation. GDP reverted back to its normal level after approximately 15 quarters, almost four years.


Related Discussions:- Analyse the effects of oil price

Compare the three investments, Compare the three investments below in terms...

Compare the three investments below in terms of their riskiness. What is the best way to evaluate the riskiness of an investment given the information you have on them? Project Exp

Michaels indifference curve and dwights indifference curve, Suppose that Mi...

Suppose that Michael and Dwight each have a $60 weekly entertainment budget. They pay the same prices for two goods, "an evening reading books" (an ERB) and "an evening of beer and

What is the total cost of producing output, What is the total cost of produ...

What is the total cost of producing output? The total cost of producing a specified quantity of output is the total of the fixed cost along with the variable cost of producing

Government in the cross model, The government in the cross model ...

The government in the cross model Net taxes NT(Y) depends positively on real GDP in the cross model In this model when national income increase

Supply & Demand Graph, Ok, so the supply curve for goal in the U.S. is perf...

Ok, so the supply curve for goal in the U.S. is perfectly elastic, while the demand curve has the usual shape. In 2011, the U.S. used 1,003 million tons of coal at an average price

Money, who are cheap money;gainers and losers

who are cheap money;gainers and losers

Trade and economic growth, Trade and Economic Growth: For a long time,...

Trade and Economic Growth: For a long time, academic debate on trade liberalization and its positive effects on growth rate remained inconclusive and unsettled. But most recen

Expected value of demand for paint, Each Home Depot store must decide how m...

Each Home Depot store must decide how much paint to order each month. From historical records, they know that the amount of paint they sell during May is distributed as follows: th

Stimulate aggregate demand, The graph shows that if policymakers respond im...

The graph shows that if policymakers respond immediately to an oil price shock by stimulating aggregate demand, shifting AD to AD* then the level of output will remain constant. Th

Explain the long-run phillips curve, Q. Explain the long-run Phillips curve...

Q. Explain the long-run Phillips curve? The long-run Phillips curve The augmented Phillips curve has an important consequence: the long-run Phillips curve must be vertical

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd