Journal of Applied Finance & Banking

On the Interaction between the Crude Oil Market and the Macroeconomic Activity: How do the 2000s differ from the 70s?

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  • Abstract

    In this paper, the Cheung-Ng procedure and the rolling correlation method are used to examine how the connection between the crude oil market and the macroeconomic fundamentals of the 2000s differs from the 70s. Our findings show that the economic meltdown (e.g. 2007-08) becomes positively correlated with oil price changes. Indeed, from the 90s the role of oil supply shocks is attenuated compared with the role of aggregate demand to drive the oil price volatility. Hence, the US economic recession leads to rising oil price volatility in the long-term. Therefore, the earlier macroeconomic dynamics permit better forecast of oil market volatility. Inversely, during the 2000s, the macroeconomic variables are found to be strongly and positively influenced by the crude oil price changes in the short-run. Interestingly, the connection of oil prices with the inflation is not really weakened in the 2000s compared with the 1970s in the US.