Oil price uncertainty and macroeconomic variables in Turkey

• DOI: http://doi.org/10.1111/opec.12186
• Date: 01 December 2020
• Published date: 01 December 2020

Oil price uncertainty and macroeconomic

variables in Turkey

Pelin

¨

Oge G ¨

uney

Department of Economics, Faculty of Economics and Administrative Sciences, Hacettepe University,

Beytepe, Ankara, Turkey. Email: pelinoge@hacettepe.edu.tr

Abstract

This study analyses the inf‌luence of uncertainty in oil prices on real economic activity, inf‌lation

and money supply in Turkey for the period 1986:1–2019:07. The uncertainty variable is measured

by the generalised autoregressive conditional heteroscedasticity (GARCH) model. To investigate

the relationship between the uncertainty in oil prices and our variables, we used the non-linear

cointegrating autoregressive distributed lag (NARL) model, considering the fact that this

relationship may not be linear. Thus, we were able to analyse the short- and long-term non-linear

relationship between the variables. Our f‌indings indicate that the impact of oil price uncertainty on

real economic activity is asymmetric: that is, real economic activity responds more to decreases in

oil price uncertainty than to long-term increases. Similarly, we conf‌irm the existence of both long-

and short-term asymmetric behaviour of inf‌lation, and our f‌indings show that positive shocks in oil

price uncertainty are more intensively transmitted to inf‌lation than negative ones. Moreover, we

provide evidence that a decline in oil price uncertainty is related to higher money supply in the

short term. These f‌indings present useful implications for designing appropriate policies to achieve

the goals related to Turkey’s economic activity and inf‌lation level.

1. Introduction

An extensive literature has examined the effect of oil prices on macroeconomic

variables. Most studies show that increased oil prices cause lower real economic activity.

Elder and Serletis (2010) proposed several transmission mechanisms as a reason for this

relationship. One such mechanism implies that an increased general price level, with an

increase in oil prices, triggers a decline in real money balances for the public, causing an

increase in the demand for money. If money supply does not increase in response to a

rising demand for money, interest rates increase, and the aggregate demand thereby

declines further (Mork, 1989). Another mechanism relates to the income transfer caused

by an upswing in oil prices between oil-importing and exporting economies: an increase

in oil prices leads to a f‌low of income from oil-importing economies to oil-exporting

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351

economies (Dohner, 1981). Finally, oil prices affect the productivity of capital and

labour.

Rising energy costs due to rising oil prices reduces oil use. The decline in

productivity of capital and labour dampens economic growth (Brown and Y ¨

ucel, 1999;

Abel and Bernanke, 2001).

Since the oil price shock of the 1970s, volatilities in oil prices have been regarded as

a signif‌icant factor of macroeconomic uncertainty. Volatility in oil prices may be caused

by factors such as political developments, wars, embargoes or terrorist attacks (Bloom,

2009). Many studies argue that, in addition to oil price, uncertainties in oil price –which

implies unanticipated changes in future oil prices –may signif‌icantly inf‌luence the

economy (Hamilton, 1983, 1996; Brown and Y ¨

ucel, 2001; Jones et al., 2004; Bloom,

2009). Since oil price uncertainty means cost uncertainty for f‌irms, they may delay

investments until more information on price volatility becomes available. Furthermore,

regarding future income and employment opportunities, households may postpone

consumption expenditures and increase precautionary savings. Specif‌ically, people want

to determine whether price changes are transitory or permanent, which implies that even

if oil prices decrease, the corresponding increase in output levels may not be as desired if

f‌irms and households are uncertain about future prices. This may explain the asymmetry

between changes in oil prices and the corresponding changes in output, which are

frequently emphasised in the literature (Davis, 1987; Hamilton, 1988; Mork, 1989;

Davis and Haltiwanger, 2001; Elder and Serletis, 2009). According to these studies,

while an increase in oil prices negatively affects economic activity, the effect of a

decrease in oil prices on economic activity is less than that proposed by linear models.

Another explanation of this asymmetric behaviour of output in response to shocks in oil

prices concerns monetary policy. Bernanke et al. (1997) stated that monetary authorities’

reaction to increase in oil prices is more aggressive than their reaction to oil price

declines (Bohi, 1991; Barsky and Kilian, 2001). Finally, Davis (1987) and Davis and

Haltiwanger (2001) stated that reallocation of capital and labour among sectors

differently inf‌luenced by oil price shocks would lead to an asymmetric reaction of

economic activity. That is, the reallocation cost of labour and capital across sectors

reduces the positive effect of a decrease in oil prices on economic activity, and vice

versa.

Previous studies emphasise that rising uncertainty in oil prices also affect the

inf‌lation rate. They present different views on the impact of oil price uncertainty on

inf‌lation (Castillo et al., 2007; Ebrahim et al., 2014). On the supply side, an increase in

prices of goods due to uncertainty in production costs creates inf‌lationary pressure. On

the demand side, a decline in investment and consumption expenditures may reduce

inf‌lation.

OPEC Energy Review December 2020 ©2020 Organization of the Petroleum Exporting Countries

352 Pelin

¨

Oge G ¨

uney