News Shocks in Open Economies: Evidence from Giant Oil Discoveries

Abstract

This paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output ̶ the delay between a discovery and production is on average 4 to 6 years. We first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery. We then estimate the effects of giant oil discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time.JEL Classification: E00, F3, F4.

Nonlinear exchange‐rate pass‐through in emerging markets

“…In our case, T = 276, and therefore we proceed by employing the standard fixed-effects estimator. Arezki, Ramey, and Sheng (2017) and Beaudry and Willems (2018) provide recent discussions of this issue in a local projection framework. 9 Many studies, especially in the fiscal policy literature, have adopted this technique to obtain impulse responses that depend on the state of the economy (see, for instance, Auerbach & Gorodnichenko, 2013;Ramey & Zubairy, 2014).…”

The heterogeneous effect of oil discoveries on democracy

“…As far as the variables related to natural resources are concerned, a limited number of papers uses oil discoveries rather than oil endowment or production (Arezki, Ramey, & Sheng, 2017;Cotet & Tsui, 2013;Lei & Michaels, 2014;Tsui, 2011). 5 Tsui (2011) argues that oil production, the typical measure of natural resource abundance, is noisy.…”

Kleptocracy and tax evasion under resource abundance

“…The appropriateness of using oil reserves is extensively discussed in Cassidy (2016). This type of data is also used in a recent paper by Arezki et al (2017).…”

“…The use of per capita income as a control must be carefully examined. Several studies suggest that oil revenues boost income (Alexeev & Conrad, 2009;Arezki et al, 2017;Smith, 2015). While static geography instruments such as absolute latitude and regions of the world have been used for example by Alexeev and Conrad (2009) such instruments amount to fixed effects and drop out in any dynamic or fixed effects estimation technique.…”

“…We employ several rich datasets. First, we exploit plausibly exogenous cross-country variations on new giant oil field discoveries (e.g., Arezki, Ramey, & Sheng, 2017) complied by Horn (2014), combining it with exogenous temporal variations from oil prices to construct a composite dynamic instrument for oil. We also use high quality data on taxation, meticulously complied by the International Center for Tax and Development (ICTD, 2014), and oil values complied by Ross (2013) both of which remedy shortcomings of other alternatives as detailed in the data section, along with datasets on transparency and accountability by Williams (2011Williams ( , 2015.…”