Do Oil Prices Matter? The Case of a Small Open Economy

Joao Tovar Jalles

This paper empirically evaluates the impact and effect of oil price fluctuations and shocks on French aggregate economic performance, industrial production index and inflation rate. Our methodology makes use of a multivariate VAR approach to analyze the stability and magnitude of this system by adopting different oil price specifications, together with a robustness check through the estimation of a St. Louis-type equation. We adopt several oil price specifications. Our results show that the main French macroeconomic aggregate variables have become progressively less reactive to oil price fluctuations and that the adjustment towards equilibrium levels have been done increasingly faster.

Key Words: Oil price fluctuations; Multivariate VAR; Causality; Impulse Response; St. Louis Equation.
JEL Classification Numbers: C32, E32, Q43.