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Introduction Petroleum Prices A Small Petroleum Exporter Results
Futures Markets, Oil Prices, and theIntertemporal Approach to the Current Account
Elif C. Arbatli
Bank of Canada
LAMESNovember 21, 2008
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Intertemporal Approach to the Current Account
Dynamic, optimizing model of the current account suggestingthat the persistence of income shocks play a key role inunderstanding the current account.
Two key challenges in testing the theory:
1 Identification of exogenous income shocks.2 Distinguishing between permanent/persistent and transitory
shocks.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Intertemporal Approach to the Current Account
Dynamic, optimizing model of the current account suggestingthat the persistence of income shocks play a key role inunderstanding the current account.
Two key challenges in testing the theory:
1 Identification of exogenous income shocks.2 Distinguishing between permanent/persistent and transitory
shocks.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Intertemporal Approach to the Current Account
Dynamic, optimizing model of the current account suggestingthat the persistence of income shocks play a key role inunderstanding the current account.
Two key challenges in testing the theory:
1 Identification of exogenous income shocks.2 Distinguishing between permanent/persistent and transitory
shocks.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Intertemporal Approach to the Current Account
Dynamic, optimizing model of the current account suggestingthat the persistence of income shocks play a key role inunderstanding the current account.
Two key challenges in testing the theory:
1 Identification of exogenous income shocks.
2 Distinguishing between permanent/persistent and transitoryshocks.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Intertemporal Approach to the Current Account
Dynamic, optimizing model of the current account suggestingthat the persistence of income shocks play a key role inunderstanding the current account.
Two key challenges in testing the theory:
1 Identification of exogenous income shocks.2 Distinguishing between permanent/persistent and transitory
shocks.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
My Solution: Petroleum Exporter-The Simplest Case
Petroleum exporter is “small” ⇒ Price fluctuationsconstitute exogenous income shocks
+
New approach to identifying persistent and transientinnovations to petroleum prices using futures markets.
⇓Yields a transparent framework to evaluate the implications ofthe intertemporal approach.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
My Solution: Petroleum Exporter-The Simplest Case
Petroleum exporter is “small” ⇒ Price fluctuationsconstitute exogenous income shocks
+
New approach to identifying persistent and transientinnovations to petroleum prices using futures markets.
⇓Yields a transparent framework to evaluate the implications ofthe intertemporal approach.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
My Solution: Petroleum Exporter-The Simplest Case
Petroleum exporter is “small” ⇒ Price fluctuationsconstitute exogenous income shocks
+
New approach to identifying persistent and transientinnovations to petroleum prices using futures markets.
⇓Yields a transparent framework to evaluate the implications ofthe intertemporal approach.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Key Results
The marginal propensity to consume out of persistent priceshocks is significantly higher than the marginal propensity toconsume out of transitory price shocks.
There is no evidence of a significant marginal propensity toconsume out of transitory price shocks.
When futures prices are not used in the identification ofdifferent price shocks evidence for the intertemporal approachis weaker.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Key Results
The marginal propensity to consume out of persistent priceshocks is significantly higher than the marginal propensity toconsume out of transitory price shocks.
There is no evidence of a significant marginal propensity toconsume out of transitory price shocks.
When futures prices are not used in the identification ofdifferent price shocks evidence for the intertemporal approachis weaker.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Key Results
The marginal propensity to consume out of persistent priceshocks is significantly higher than the marginal propensity toconsume out of transitory price shocks.
There is no evidence of a significant marginal propensity toconsume out of transitory price shocks.
When futures prices are not used in the identification ofdifferent price shocks evidence for the intertemporal approachis weaker.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Key Results
The marginal propensity to consume out of persistent priceshocks is significantly higher than the marginal propensity toconsume out of transitory price shocks.
There is no evidence of a significant marginal propensity toconsume out of transitory price shocks.
When futures prices are not used in the identification ofdifferent price shocks evidence for the intertemporal approachis weaker.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Petroleum Prices
Log of the spot price is assumed to be given by:
pc,t = ψt + χt
where ψt is the permanent component and χt is the transitorycomponent. (Schwartz and Smith, 2000) and (Herce, Parsons andReady, 2006)
ψt = µc + ρψt−1 + εψ,t
χt = φχt−1 + εχ,t
Benchmark: Purely permanent (ρ = 1) and purely transitoryshocks (0 < φ < 1)
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Using Futures Prices to Identify Oil Price Shocks (1)
Futures prices contain information about future spot prices:
pc,t = ψt + χt
ft,t+n = Et(ψt+n + χt+n)− ωn
ft,t+n futures contract that expires in n periodsωn constant risk premium
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Futures Term Structure with Permanent and TransitoryShocks
0
0.005
0.01
0.015
0.02
0.025
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Impu
lse
Res
pons
e to
Per
m. a
nd T
rans
. Sho
cks
Permanent Component
Transitory Component
phi=0.95
phi=0.90
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Using Futures Prices to Identify Oil Price Shocks (2)
Express all the observables (spot and futures prices) as astate-space model and estimate the parameters of the modelusing maximum likelihood.
pc,t = ψt + χt
ft,t+n = nµc + ρnψt + φnχt − ωn
Calculate permanent and transitory components of petroleumprices using the Kalman Filter.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Data-Petroleum Prices
Crude oil futures traded in NYMEX (since 1983).
Monthly averages of spot prices, 3, 6, 9, 12 and 15 monthsahead futures prices in the estimation.
Data Source:
West Texas Intermediate (WTI) spot price data from theEnergy Information Administration.Futures prices are constructed using historical end of dayfutures price data from Price-Data.com
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Permanent and Transitory Comp. of Petroleum Prices
2
12
22
32
42
52
62
72
82
92
Apr-83
Apr-84
Apr-85
Apr-86
Apr-87
Apr-88
Apr-89
Apr-90
Apr-91
Apr-92
Apr-93
Apr-94
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Pric
e ($
/bar
rel)
Permanent Component Predicted Spot Price Actual Spot Price
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Consensus Forecasts
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
Oct-89
Oct-90
Oct-91
Oct-92
Oct-93
Oct-94
Oct-95
Oct-96
Oct-97
Oct-98
Oct-99
Oct-00
Oct-01
Oct-02
Oct-03
Oct-04
Oct-05
Expe
cted
Cha
nge
In S
pot P
rices
(% o
f Spo
t Pric
es)
(12-
mon
th -
3-m
onth
For
ecas
t)
Consensus Forecasts Model
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
A Model Of the Current Account For a Petroleum Exporter
1 A country that only produces petroleum and consumesimported goods from the rest of the world.
2 Optimization Problem: maxU = Et∑∞
i=0 βiu(Ct+i )
3 Period Budget Constraint: Bt = (1 + r)Bt−1 + QC ,t−1 − Ct−1
4 Intertemporal Budget Constraint:(1 + r)Bt +
∑∞i=0(1/1 + r)iEtQC ,t+i =
∑∞i=0(1/1 + r)iEtCt+i
5 Income: QC ,t = XC ,t(PC ,t/PM,t)
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
A Model Of the Current Account For a Petroleum Exporter
1 A country that only produces petroleum and consumesimported goods from the rest of the world.
2 Optimization Problem: maxU = Et∑∞
i=0 βiu(Ct+i )
3 Period Budget Constraint: Bt = (1 + r)Bt−1 + QC ,t−1 − Ct−1
4 Intertemporal Budget Constraint:(1 + r)Bt +
∑∞i=0(1/1 + r)iEtQC ,t+i =
∑∞i=0(1/1 + r)iEtCt+i
5 Income: QC ,t = XC ,t(PC ,t/PM,t)
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
A Model Of the Current Account For a Petroleum Exporter
1 A country that only produces petroleum and consumesimported goods from the rest of the world.
2 Optimization Problem: maxU = Et∑∞
i=0 βiu(Ct+i )
3 Period Budget Constraint: Bt = (1 + r)Bt−1 + QC ,t−1 − Ct−1
4 Intertemporal Budget Constraint:(1 + r)Bt +
∑∞i=0(1/1 + r)iEtQC ,t+i =
∑∞i=0(1/1 + r)iEtCt+i
5 Income: QC ,t = XC ,t(PC ,t/PM,t)
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
A Model Of the Current Account For a Petroleum Exporter
1 A country that only produces petroleum and consumesimported goods from the rest of the world.
2 Optimization Problem: maxU = Et∑∞
i=0 βiu(Ct+i )
3 Period Budget Constraint: Bt = (1 + r)Bt−1 + QC ,t−1 − Ct−1
4 Intertemporal Budget Constraint:(1 + r)Bt +
∑∞i=0(1/1 + r)iEtQC ,t+i =
∑∞i=0(1/1 + r)iEtCt+i
5 Income: QC ,t = XC ,t(PC ,t/PM,t)
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
A Model Of the Current Account For a Petroleum Exporter
1 A country that only produces petroleum and consumesimported goods from the rest of the world.
2 Optimization Problem: maxU = Et∑∞
i=0 βiu(Ct+i )
3 Period Budget Constraint: Bt = (1 + r)Bt−1 + QC ,t−1 − Ct−1
4 Intertemporal Budget Constraint:(1 + r)Bt +
∑∞i=0(1/1 + r)iEtQC ,t+i =
∑∞i=0(1/1 + r)iEtCt+i
5 Income: QC ,t = XC ,t(PC ,t/PM,t)
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
A Model Of the Current Account For a Petroleum Exporter
1 A country that only produces petroleum and consumesimported goods from the rest of the world.
2 Optimization Problem: maxU = Et∑∞
i=0 βiu(Ct+i )
3 Period Budget Constraint: Bt = (1 + r)Bt−1 + QC ,t−1 − Ct−1
4 Intertemporal Budget Constraint:(1 + r)Bt +
∑∞i=0(1/1 + r)iEtQC ,t+i =
∑∞i=0(1/1 + r)iEtCt+i
5 Income: QC ,t = XC ,t(PC ,t/PM,t)
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Optimal Import Consumption Response
∆Ct =r
1 + r
∞∑i=0
(1
1 + r
)i
(Et − Et−1) QC ,t+i
∆Ct
QC ,t−1≈ θψεψ,t + θχεχ,t + et
θψ ≈ 1 and θχ ≈ 0
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Petroleum Exporters
Country % of Exports† % of World Production†† OPEC Member(1983-2005) (1983-2004) since
Nigeria 96 3.0 1971Oman 80 1.2 -Angola 78 0.9 2007Libya 76 2.1 1962Congo 75 0.3 -Gabon 73 0.4 1975-1995Iran 70 5.1 1960Venezuela 58 3.9 1960Qatar 53 0.8 1961Syria 52 0.7 -Algeria 46 1.9 1969Ecuador 43 0.5 1963-1993Norway 36 3.4 -Cameroon 35 0.2 -Trinidad and Tobago 27 0.2 -Egypt 26 1.3 -Colombia 19 0.8 -Indonesia 17 2.3 1962Mexico 15 4.6 -Average 51 1.8 -
† Data from UNCTAD Handbook of Statistics. †† Data from International Energy Annual 2004 published by
Energy Information Administration.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Estimating the Marginal Propensity to Consume
The innovations to permanent and transitory components areconverted to annual frequency and adjusted for other exports.
The marginal propensities to consume out of permanent andtransitory shocks are estmated using the adjusted innovationsεψ,t,i and εχ,t,i :
∆Ct,i
Qt−1,i= ci + θ1εψ,t,i + θ2εχ,t,i + εt,i
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Estimates of Marginal Propensity To Consume
∆Ct,i
Qt−1,i
= ci + θ1εψ,t,i + θ2εχ,t,i + εt,i
Sample θ1 (Std. Error) θ2 (Std. Error) θ1 = θ2 Num. ofp-value Obs.
1 All Countries 0.329*** (0.127) -0.096 (0.147) 0.04 4372 Excluding 2005-2006 0.354* (0.196) -0.120 (0.180) 0.13 3803 Excluding Iran 0.345*** (0.110) -0.159 (0.125) 0.01 4144 Excluding Norway, Nigeria, 0.334*** (0.104) -0.100 (0.122) 0.01 322
Iran, Venezuela and Mexico5 Opec Members 0.319 (0.256) -0.029 (0.296) 0.41 1836 Other Petroleum Exporters 0.331*** (0.073) -0.164 (0.082) 0.00 254
Fixed effects were incorporated in all the regressions even though their values are not reported in the table. Pooled
OLS estimates with correlated panels corrected standard errors. *** Significant at the 1% level, ** Significant at
the 5% level, * Significant at the 10% level
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
MPC Estimates-With and Without Long Horizon FuturesPrices
Marginal Propensity To Consume (With and Without Futures Prices)
∆Ct,i
Qt−1,i
= ci + θ1εψ,t,i + θ2εχ,t,i + εt,i
Parameters 3 Month Futures Prices Full Set of Futures Pricesθ1 0.186 0.329***
(0.125) (0.127)θ2 -0.212 -0.096
(0.209) (0.147)θ1 = θ2 (p-value) 0.11 0.04
Fixed effects were incorporated in all the regressions even though their values are not reported in the table. Pooled
OLS estimates with correlated panels corrected standard errors. *** Significant at the 1% level, ** Significant at
the 5% level, * Significant at the 10% level
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Marginal Propensity to Import Out of Oil Price Shocks
Parameter MPCP MPCT
r = 0.04 , ρ = 1 1 0.04r = 0.04 , ρ = 0.999 0.77 0.04r = 0.04 , ρ = 0.997 0.53 0.04r = 0.06 , ρ = 1 1 0.06r = 0.06 , ρ = 0.999 0.83 0.06r = 0.06 , ρ = 0.997 0.63 0.06
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Implications
Persistence of shocks is important in explaining currentaccount fluctuations.
Despite the fact that petroleum is highly durable, fluctuationsin petroleum prices are mostly transitory.
Most petroleum price shocks therefore have a large effect onthe current accounts of petroleum exporters.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Implications
Persistence of shocks is important in explaining currentaccount fluctuations.
Despite the fact that petroleum is highly durable, fluctuationsin petroleum prices are mostly transitory.
Most petroleum price shocks therefore have a large effect onthe current accounts of petroleum exporters.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Implications
Persistence of shocks is important in explaining currentaccount fluctuations.
Despite the fact that petroleum is highly durable, fluctuationsin petroleum prices are mostly transitory.
Most petroleum price shocks therefore have a large effect onthe current accounts of petroleum exporters.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Implications
Persistence of shocks is important in explaining currentaccount fluctuations.
Despite the fact that petroleum is highly durable, fluctuationsin petroleum prices are mostly transitory.
Most petroleum price shocks therefore have a large effect onthe current accounts of petroleum exporters.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Caveats
Non-Tradables, Other Exported Goods
Correlation between petroleum price shocks and import priceshocks
Re-importing refined petroleumPass-through to the prices of imported goods
Correlation between petroleum price shocks and output ofpetroleum
OPECInvestment in drilling and exploration
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Caveats
Non-Tradables, Other Exported Goods
Correlation between petroleum price shocks and import priceshocks
Re-importing refined petroleumPass-through to the prices of imported goods
Correlation between petroleum price shocks and output ofpetroleum
OPECInvestment in drilling and exploration
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Caveats
Non-Tradables, Other Exported Goods
Correlation between petroleum price shocks and import priceshocks
Re-importing refined petroleumPass-through to the prices of imported goods
Correlation between petroleum price shocks and output ofpetroleum
OPECInvestment in drilling and exploration
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Caveats
Non-Tradables, Other Exported Goods
Correlation between petroleum price shocks and import priceshocks
Re-importing refined petroleumPass-through to the prices of imported goods
Correlation between petroleum price shocks and output ofpetroleum
OPECInvestment in drilling and exploration
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Conclusions
The marginal propensity to consume out of permanent shocksis higher than the marginal propensity to consume out oftransitory shocks.
There is no evidence of a significant marginal propensity toconsume out of transitory shocks.
When futures prices are not used in the identification ofdifferent shocks, the evidence for the intertemporal approachis weaker.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Conclusions
The marginal propensity to consume out of permanent shocksis higher than the marginal propensity to consume out oftransitory shocks.
There is no evidence of a significant marginal propensity toconsume out of transitory shocks.
When futures prices are not used in the identification ofdifferent shocks, the evidence for the intertemporal approachis weaker.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Conclusions
The marginal propensity to consume out of permanent shocksis higher than the marginal propensity to consume out oftransitory shocks.
There is no evidence of a significant marginal propensity toconsume out of transitory shocks.
When futures prices are not used in the identification ofdifferent shocks, the evidence for the intertemporal approachis weaker.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Conclusions
The marginal propensity to consume out of permanent shocksis higher than the marginal propensity to consume out oftransitory shocks.
There is no evidence of a significant marginal propensity toconsume out of transitory shocks.
When futures prices are not used in the identification ofdifferent shocks, the evidence for the intertemporal approachis weaker.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Research Agenda
Extension to other commodities.
Long-run fluctuations in commodity prices and the realexchange rate dynamics in commodity exporting countries.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Petroleum Prices-With and Without Futures Prices
2
12
22
32
42
52
62
72
82
92
Apr-83
Apr-84
Apr-85
Apr-86
Apr-87
Apr-88
Apr-89
Apr-90
Apr-91
Apr-92
Apr-93
Apr-94
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Pric
e ($
/bar
rel)
With Futures Prices Without Futures Prices With 3 Month Futures
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Crude Oil Prices (January 1995-October 2008)
0
20
40
60
80
100
120
140
160
Jan 9
5
Jun 9
5
Nov 95
Apr 96
Sep 96
Feb 97
Jul 9
7
Dec 97
May 98
Oct 98
Mar 99
Aug 99
Jan 0
0
Jun 0
0
Nov 00
Apr 01
Sep 01
Feb 02
Jul 0
2
Dec 02
May 03
Oct 03
Mar 04
Aug 04
Jan 0
5
Jun 0
5
Nov 05
Apr 06
Sep 06
Feb 07
Jul 0
7
Dec 07
May 08
Oct 08
$ pe
r bar
rel
permanent component spot price
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Why Petroleum?
Many countries have a large fraction of their exports come frompetroleum.
Commodity Average % of Exports Number of CountriesCrude Petroleum 51 19
Cocoa 47 3Cotton 41 7Copper 37 3Coffee 35 12
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Mincer-Zarnowitz Forecast Efficiency Regressions
pc,t+n − pc,t = α + β(ft,t+n − pc,t ) + εt
Future α β R2
Num. of α=0 and β=1(std. error) (std. error) Obs. p-value
3 month 0.020 1.189 0.052 281 0.14(0.010) (0.377)
6 month 0.041 0.910 0.062 278 0.00(0.014) (0.246)
9 month 0.055 0.714 0.048 275 0.00(0.016) (0.200)
12 month 0.080 0.893 0.080 232 0.00(0.021) (0.174)
15 month 0.101 0.961 0.096 269 0.00(0.021) (0.173)
* Standard errors are HAC standard errors.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Properties of Different Futures Prices
0.000
0.001
0.002
0.003
0.004
0.005
0.006
0.007
0.008
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Contract Maturity
Var (
Cha
nge
in ln
(Fut
ure
Pric
es))
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Estimates of the Model Parameters For Petroleum Prices
Parameter Estimate Std. Errorφ 0.9254 (0.0023)µ 0.0032 (0.0020)σ2ψ 0.0019 (0.0002)σ2χ 0.0062 (0.0005)
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Marginal Propensity to Import Out of Oil Price Shocks (1)
We identify innovations to pc,t+i and want to write ∆CtQC ,t−1
in terms
of shocks to petroleum prices:
∆Ct
QC ,t−1≈ r(1 + µq)
1 + r − (1 + µq)ρεψ,t +
r(1 + µq)
1 + r − (1 + µq)φεχ,t + et
where et contains all the innovations to other components ofincome.Given the estimate for φ and under reasonable assumptions for µq
and r :
r(1+µq)1+r−(1+µq)ρ ≈ 1 if ρ = 1 and
r(1+µq)1+r−(1+µq)φ ≈0.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Adjusting Price Shocks
Before we can estimate the following reduced form equationusing OLS:
∆Ct
QC ,t−1= c + θ1ε̂ψ,t + θ2ε̂χ,t + et
Need to account for other exports
∆Ct
Qt−1= c + θ1
(QC ,t−1
Qt−1ε̂ψ,t
)+ θ2
(QC ,t−1
Qt−1ε̂χ,t
)+ et
Need to aggregate to annual frequency.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Data
UN National Income Accounts to construct measures of realimports and exports.
UN COMTRADE and UNCTAD Handbook Statisticsdatabases for the value and quantity of commodity exports
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
What Difference Futures Prices Make?
When futures prices are not included, the predicted permanentcomponent is larger. Futures prices help identifying transitoryshocks.
Parameter Without Futures With Futuresφ 0.9587 0.9254
(0.0023) (0.0023)µ 0.0021 0.0032
(0.0037) (0.0020)σ2ψ 0.0036 0.0019
(0.0039) (0.0002)σ2χ 0.0028 0.0062
(0.0038) (0.0005)Var(4st) 0.56 0.23due to εψ
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Model Fit
Future Mean Error Mean Absolute ErrorSpot 0.0000 0.03143 month 0.0000 0.01096 month 0.0000 0.00009 month 0.0000 0.002212 month 0.0000 0.000015 month 0.0000 0.0037
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Parameter Estimates of the Empirical Model For Petroleum Prices
Parameter Estimate Std. Errorφ 0.9254 (0.0023)µ 0.0032 (0.0020)σ2ψ 0.0019 (0.0002)σ2χ 0.0062 (0.0005)ω3 0.0166 (0.0026)ω6 0.0385 (0.0017)ω9 0.0581 (0.0025)ω12 0.0755 (0.0038)ω15 0.0917 (0.0032)
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Marginal Propensity to Consume-Individual Countries
Country θ1 (Std. Err.) θ2 (Std. Err.) R2
Nigeria 0.412 (0.530) -0.505 (0.500) -0.03Oman 0.294 (0.161) -0.113 (0.199) 0.06Angola -0.115 (0.320) -0.342 (0.345) -0.03Libya 0.187 (0.206) 0.112 (0.250) -0.03Congo 0.306 (0.207) 0.259 (0.247) 0.11Gabon -0.215 (0.301) 0.011 (0.275) -0.07Iran 0.803 (0.429) 0.246 (0.419) 0.11Venezuela 0.024 (0.313) -0.061 (0.413) -0.10Qatar 0.474 (0.318) 0.233 (0.299) 0.08Syria 0.548 (0.280) -0.025 (0.256) 0.10Algeria 0.159 (0.341) -0.035 (0.415) -0.09Ecuador 0.272 (0.305) -0.528 (0.505) -0.02Norway -0.003 (0.123) -0.142 (0.135) -0.04Cameroon 0.074 (0.559) 0.147 (0.480) -0.10Trinidad and Tobago -0.721 (0.727) -0.126 (1.352) -0.04Egypt 0.299 (0.432) 0.014 (0.724) -0.07Colombia 1.940 (0.990) -1.592 (0.770) 0.17Mexico 0.596 (0.663) 0.342 (1.580) -0.05Indonesia 0.642 (0.683) 0.280 (1.564) -0.04
Number of observations is 22 for all countries except Syria which has 20 observations. A constant was included in
all regressions even though their values are not reported in the table.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
“[petroleum exporters] have spent a smaller share of their latestwindfall on imports of goods and services than during previous oilshocks, ... even though the futures markets expect oil prices tostay high.”
“Recycling the Petrodollars”, Economist, November 10, 2005.
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
If we had assumed a process for QC ,t with a purely permanentand a purely transitory component, we would have:
∆Ct = εP,t +r
1 + rεT ,t
where εP,t : permanent shock and εT ,t : transitory shock
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Market Commentaries: Collapse of OPEC Quotas in 1986
Futures prices predict large permanent shocks
“Market awaits meeting of OPEC ministers, but no action tostabilize prices expected... Meanwhile, more companies slashbudgets, staff.” March 10, 1986.
“No big oil price rebound seen after decline” March 17, 1986.
“OPEC struggles to prop up oil prices” March 24, 1986.
Source: Oil & Gas Journal
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Market Commentaries: Gulf Crisis, August-September 1990
Futures prices predict large transitory shocks.
“... Other analysts believe the situation will stabilize soon andprices will again return to roughly pre-invasion levels... Oil pricesapproaching $ 50/bbl could not be sustained for long. Even a priceapproaching $ 30/bbl probably would bring into play market forcesthat would undermine that price level.” August 13, 1990
Source: Oil & Gas Journal
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
Market Commentaries: Price Hikes of 2004-2005
Futures prices predict a large permanent component in theprice hikes.
“Oil’s new era” February 21, 2005.
“Oil prices establish new, higher plateau, analysts say” May 9,2005.
Source: Oil & Gas Journal
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account
Introduction Petroleum Prices A Small Petroleum Exporter Results
A Wrinkle
Derived for level, need implication for logs (Campbell andDeaton (1989)):
∆Ct =r
1 + rΣ∞i=0
(1
1 + r
)i
(Et − Et−1)QC ,t+i
⇓
∆Ct
QC ,t−1≈ r(1 + µq)
r − µq
∞∑i=0
(1 + µq
1 + r
)i
(Et − Et−1) ∆qc,t+i
where qc,t+i = pc,t+i − pm,t+i + yc,t+i ,qc,t = log(QC ,t), pc,t+i = log(PC ,t), pm,t+i = log(PM,t) andyc,t+i = log(YC ,t)
Elif C. Arbatli Bank of Canada
Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account