Effects of an oil price shock - empirically analyses, Macroeconomics

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This paper empirically analyses the effect of oil price shocks on key macroeconomic indicators in the United Kingdom.The aim of the paper is to establish a relationship between oil prices and several indicators. An unrestricted VAR analysis is carried out. Granger Causality testing and impulse response functions are analysed. There is evidence that lagged values of the oil price variable Granger cause and helps to predict GDP, inflation and interest rates at the 95% significant level. The impulse response functions are then analysed for each variable. The results of the impulse responses show that there is a significant negative impact throughout the short, medium and long term in the UK economy. The principal finding of this paper is that there is sufficient evidence of a countercyclical relationship between oil prices and the UK economy, in one direction. That is when oil prices increase, the economic performance of the UK decreases.


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