The impact of oil price shocks on the term structure of interest rates

Abstract

In a structural VAR framework, we study the impact of oil price shocks in the global crude oil market on the dynamics of the entire yield curve in four industrialised countries with different positions on the oil market; the US, Canada, Norway, and South Korea. Responses of the term structure factors to oil market shocks are shown to differ contingent on the underlying sources that drive oil price shocks and the country's dependence on oil. Oil market-specific demand shocks result in increases in the level factor in oil-importing countries, but have no such effect in oil-exporting countries. Oil supply disruptions have short-lived negative responses of the slope factors in the US and Canada, associated with loosening monetary policy, whilst demand side shocks tend to lead to increases the slope in all countries. Overall, oil supply and demand shocks jointly account for a considerable amount of the observed variation in the term structure of interest rates.

Oil and Mortality

“…The impacts of oil price shocks on different aspects of an economy have been widely discussed in the literature (see e.g. Park and Ratti, 2008;Jimenez-Rodriguez, 2008;Farzanegan and Markwardt, 2009;Iwayemi and Fowowe, 2011;Aydın and Acar, 2011;Scholtens and Yurtsever, 2012;Cunado and de Gracia, 2014;Gao et al, 2014;Kang et al, 2014;Zhang and Qu, 2015;Tsai, 2015;Cunado et al, 2015;Ju et al, 2016;Zhang and Tu, 2016;Nusair, 2016;Zhao, 2016;Kim et al, 2017;Cross and Nguyen, 2017;Lee et al, 2017;Karnizova and Reza, 2018;Moshiri and Moghaddam, 2018;Nasir et al, 2018;Ioannidis and Ka, 2018;Oladosu et al, 2018;Lorusso and Pieroni, 2018;Tchatoka et al, 2018;Herrera et al, 2019;Lee and Lee, 2019;Nusair and Olson, 2019;Grigoli, et al, 2019;Bergmann, 2019). However, the mentioned studies are different from our paper because what they consider as oil price shocks is not a same concept as what we refer to as the 1973 oil price shock.…”

Oil and Mortality

“…The impacts of oil price shocks on different aspects of an economy have been widely discussed in the literature (see e.g. Park and Ratti, 2008;Jimenez-Rodriguez, 2008;Farzanegan and Markwardt, 2009;Iwayemi and Fowowe, 2011;Aydın and Acar, 2011;Scholtens and Yurtsever, 2012;Cunado and de Gracia, 2014;Gao et al, 2014;Kang et al, 2014;Zhang and Qu, 2015;Tsai, 2015;Cunado et al, 2015;Ju et al, 2016;Zhang and Tu, 2016;Nusair, 2016;Zhao, 2016;Kim et al, 2017;Cross and Nguyen, 2017;Lee et al, 2017;Karnizova and Reza, 2018;Moshiri and Moghaddam, 2018;Nasir et al, 2018;Ioannidis and Ka, 2018;Oladosu et al, 2018;Lorusso and Pieroni, 2018;Tchatoka et al, 2018;Herrera et al, 2019;Lee and Lee, 2019;Nusair and Olson, 2019;Grigoli, et al, 2019;Bergmann, 2019). However, the mentioned studies are different from our paper because what they consider as oil price shocks is not a same concept as what we refer to as the 1973 oil price shock.…”

Oil price shocks and yield curve dynamics in emerging markets

“…A more surprising finding is that unanticipated demand shocks initially have a negative effect on the slope factor contrary to conventional monetary policy reaction based on the Taylor-rule (Taylor, 1993). As suggested by Ioannidis and Ka (2018), the demand shocks lead to flattening of the yield curve since investors conclude that the response of the short rate was not adequate to control future expected inflation. This leads to a strong monetary tightening in the coming months to support price stability which results in a positive impact on slope factor.…”