The nature of oil shocks and the global economy

This paper identifies the main driving force behind oil price shocks in 1970–2006 by applying a simple identification strategy of supply‐driven and demand‐driven price shocks. The identification hypothesis states that supply‐driven oil price shocks have a negative impact on the macroeconomic activity of countries, which are net consumers of oil while demand‐driven oil price shocks do not have negative effects. In order to identify global demand‐driven shocks, a weighted aggregate GDP series of countries, which are net consumers of oil, is constructed over 1970–2006. The key result is that the main driving force behind oil price shocks has changed from supply‐driven shocks in 1970–1992 to demand‐driven shocks in 1992–2006.