The dynamics of oil prices, uncertainty measures and unemployment: a time and frequency approach

Abstract

PurposeThis study investigates the nexus between the returns on oil prices (OP) and unemployment (UR) while taking into account the influences of two of the most representative measures of uncertainty, the Baker et al. (2016) and Caldara and Iacovello (2021) indexes of economic policy uncertainty (EP) and geopolitical risks (GP), in the relationship.Design/methodology/approachThe authors use data on the US, Canada, France, Italy, Germany and Japan from January 2000 to February 2022 and the UK from January 2000 to December 2021. The authors then apply the continuous wavelet transform (CWT), wavelet coherence (WC), partial wavelet coherence (PWC) and multiple wavelet coherence (MWC) to examine the returns within a time and frequency framework.FindingsThe CWT tracks the movement and evolution of individual return series with evidence of high variances and heterogenous tendencies across frequencies that also align with critical events such as the GFC and COVID-19 pandemic. The WC reveals the presence of a bidirectional relationship between OP and UR across economies, showing that the two variables affect each other. The authors’ findings establish the predictive influence of oil price on unemployment in line with theory and also show that the variation in UR can impact the economy and alter the dynamics of OP. The authors employ the PWC and MWC to capture the impact of uncertainty indexes in the co-movement of oil price and unemployment in line with the theory of “investment under uncertainty”. Taking into account the common effects of EP and GP, PWC finds that uncertainty measures significantly drive the co-movement of oil prices and unemployment. This result is robust when the authors control for the influence of economic activity (proxied by the GDP) in the co-movement. Furthermore, the MWC reveals the combined intensity, strength and significance of both oil prices and the uncertainty measures in predicting unemployment across countries.Originality/valueThis study investigates the relationship between oil prices, uncertainty measures and unemployment under a time and frequency approach.HighlightsWavelet approaches are used to examine the relationship between oil prices and unemployment in the G7.We account for uncertainty measures in the dynamics of oil prices and unemployment.We observe a bidirectional relationship between oil prices and unemployment.Uncertainty measures significantly drive oil prices and unemployment co-movement.Both oil prices and uncertainty measures significantly drive unemployment.

Political Uncertainty and Initial Public Offerings: A Literature Review

“…EPU is considered a more robust technique for predicting exchange rate volatility when compared to other macro-economic variables (Ruan et al 2023). Adeosun et al (2023) used Baker's EPU index to find out the impact of uncertainty and oil prices. In this paper, we mainly focus on political-and policy-related uncertainty; hence, we shall consider the measure for economic policy uncertainty of Baker et al (2016).…”

Economic policy uncertainty on stock market risk contagion: a network-based approach

“…The impact of the EPU index on macroeconomic limits has been widely studied in recent years, and it can trigger stock market fluctuation [4,5], playing an increasingly important role in global risk contagion [6]. EPU is one of the causes of slow global economic growth, and when there is a high spillover of EPU risk, the performance of the real economy and financial markets deteriorates [7,8]. Therefore, EPU can be used as a good predictor of economic development and financial market volatility.…”

Factor Input Prices and Unemployment in Uganda

“…In Uganda, these factor input prices have had significant impacts on unemployment levels (James, Eria, & Ibrahim, 2023). For instance, international oil prices fluctuated between $65.32 per barrel in 2021 and $79.40 per barrel in 2023, influencing transportation costs and production expenses across various sectors (Adeosun et al, 2023). Lending interest rates averaged 15.7% in 2021, increasing to 16.5% in 2023, affecting borrowing costs for businesses and individuals (Adeosun et al, 2023).…”

“…For instance, international oil prices fluctuated between $65.32 per barrel in 2021 and $79.40 per barrel in 2023, influencing transportation costs and production expenses across various sectors (Adeosun et al, 2023). Lending interest rates averaged 15.7% in 2021, increasing to 16.5% in 2023, affecting borrowing costs for businesses and individuals (Adeosun et al, 2023). The dynamics of employment have also been impacted by fluctuations in the real effective exchange rate, with the Ugandan Shilling falling from 3,700 UGX per US dollar in 2020 to 3,850 UGX per US dollar in 2022 (Umoru et al, 2023).…”