News Shocks in Open Economies: Evidence from Giant Oil Discoveries

Jan 2015 | 153

Authors: Rabah Arezki, Valerie A Ramey, Liugang Sheng

This paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output ̶ the delay between a discovery and production is on average 4 to 6 years. We first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery. We then estimate the effects of giant oil discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time.

JEL Codes: E00, F3, F4

Keywords: news shocks, current account, saving, investment, employment, oil, discovery

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