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OPEC’s oil exporting strategy and macroeconomic (in)stability

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  • Luis Aguiar-Conraria
  • Yi Wen
Abstract
Aguiar-Conraria and Wen (2008) argued that dependence on foreign oil raises the likelihood of equilibrium indeterminacy (economic instability) for oil importing countries. We argue that this relation is more subtle. The endogenous choices of prices and quantities by a cartel of oil exporters, such as the OPEC, can affect the directions of the changes in the likelihood of equilibrium indeterminacy. We show that fluctuations driven by self-fulfilling expectations under oil shocks are easier to occur if the cartel sets the price of oil, but the result is reversed if the cartel sets the quantity of production. These results offer a potentially interesting explanation for the decline in economic volatility (i.e., the Great Moderation) in oil importing countries since the mid-1980s when the OPEC cartel changed its market strategies from setting prices to setting quantities, despite the fact that oil prices are far more volatile today than they were 30 years ago.>

Suggested Citation

  • Luis Aguiar-Conraria & Yi Wen, 2011. "OPEC’s oil exporting strategy and macroeconomic (in)stability," Working Papers 2011-013, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2011-013
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    4. Snudden, Stephen, 2016. "Cyclical fiscal rules for oil-exporting countries," Economic Modelling, Elsevier, vol. 59(C), pages 473-483.
    5. Luís Aguiar-Conraria & Teresa Maria Rodrigues & Maria Joana Soares, 2014. "Oil Shocks and the Euro as an Optimum Currency Area," Dynamic Modeling and Econometrics in Economics and Finance, in: Marco Gallegati & Willi Semmler (ed.), Wavelet Applications in Economics and Finance, edition 127, pages 143-156, Springer.
    6. Olesia Kozlova & Jose Noguera-Santaella, 2019. "Relative efficiency of oil price versus oil output in promoting economic growth: Is OPEC’s strategy right?," Empirical Economics, Springer, vol. 57(6), pages 1997-2012, December.
    7. Yen-Hsien Lee & Ting-Huei Liao & Ya-Ling Huang & Tzu-Ling Huang, 2015. "Dynamic Spillovers between Oil and Stock Markets: New Approaches at Spillover Index," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(2), pages 178-189, April.
    8. Funashima, Yoshito, 2017. "Time-varying leads and lags across frequencies using a continuous wavelet transform approach," Economic Modelling, Elsevier, vol. 60(C), pages 24-28.
    9. Mensi, Walid & Hammoudeh, Shawkat & Yoon, Seong-Min, 2014. "How do OPEC news and structural breaks impact returns and volatility in crude oil markets? Further evidence from a long memory process," Energy Economics, Elsevier, vol. 42(C), pages 343-354.
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    More about this item

    Keywords

    Organization of Petroleum Exporting Countries; Petroleum industry and trade;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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