Do Oil Price Shocks Affect Household Consumption?

Abstract

The paper addresses whether international oil price change has any impact on consumer spending. The study is conducted using Organisation for Economic Co-operation and Development nations, which have been chosen deliberately based on their economic importance and classifying each into oil importing and exporting countries: Canada, Germany, the UK and the USA. Applying the empirical methodology of the vector autoregressive model, we find evidence that international oil price shocks have a significant impact on consumer spending. The analysis is performed with two sets of specification for oil (‘Oil price change’ and ‘Net oil price increase’) and the main tools used for diagnosis are forecast error variance decomposition and impulse–response functions.

The results are strongly significant for Canada and the USA. The results for Germany and the UK are mixed, which leads us to an inconclusive decision about the impact on these countries. However, in general, our empirical work supports the evidence that oil prices have some predictive power in influencing consumption decisions across oil-importing and oil-exporting countries.