NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

News Shocks in Open Economies: Evidence from Giant Oil Discoveries

Rabah Arezki, Valerie A. Ramey, Liugang Sheng

NBER Working Paper No. 20857
Issued in January 2015
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics

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.

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Document Object Identifier (DOI): 10.3386/w20857

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