The Impact of Global Economic Activity, Oil Supply and Speculative Oil Shocks on the Russian Economy

Abstract

In this work we build a Bayesian vector autoregression model to estimate the impact of global economic activity shocks, supply shocks in the global oil market, as well as speculative oil shocks on key macroeconomic variables of the Russian economy: GDP, household consumption, fixed capital investment, import, export, real effective exchange rate, real wages and income, MIACR interest rate and GDP deflator. The model uses real oil prices, the index of global economic activity, oil production and oil inventories as exogenous variables. The model parameters are estimated for the period from Q1 1999 to Q4 2019. The dynamics of four exogenous variables is described using a separate external vector autoregression model, which is estimated over an extended time period from Q1 1974 to Q4 2019 in order to more accurately estimateits parameters and identify shocks. Shocks are identified based on the approach proposed in [Kilian, Murphy, 2014], which uses sign restrictions and restrictions on the price elasticities of oil demand and oil supply. According to estimates of impulse responses, such variables as real household consumption, imports, and the exchange rate respond positively and statistically significantly to all three shocks leading to an increase in oil prices. However, a shock to global economic activity has a stronger impact. With an increase in oil prices for real GDP, investment and exports a stable and statistically significant positive impact is observed only when this price increase is due to a shock to global economic activity. The work also estimates a forecast error variance decomposition and a historical decomposition of the domestic variables by shocks, which indicate the prevailing role of shocks in global economics activity in the dynamics of Russian macroeconomic variables.