Oil price and macroeconomy in India – An evolutionary cospectral coherence approach

Abstract

The aim of this paper is to focus on whether or not an interaction relationship (or dependence) exists between the oil price and fundamental macroeconomic variables (that is industrial production, a proxy of macroeconomic activity, and inflation, measured by wholesale price index, Trade deficit, a measure of external account sustainability, and India-US exchange rate), calling upon the notion of correlation and then dynamic correlation. In our contribution we used the evolutionary co-spectral analysis (ESA) as presented Priestley and Tong (1973) and based on the methodology of Ftiti (2010), to analyze the impact of oil price changes in three macroeconomic variables namely industrial production, CPI based inflation and trade deficit. The ESA illustrates the evolution of the co-variance of a time-series at the different frequencies; the ESA demonstrates the correlation coefficient in the time–frequency space; and the information on the delay between the oscillations of two time-series i.e., lead–lag relationships provided by phase-difference. Our results show. Our results show that the degree of co-movement between the oil price index and the overall macroeconomic variables exhibit different patterns across the macroeconomic indicators. However, a common feature among the calculated comovements is that they re are higher in the short-term than in long-term. As economic implication, this later traduces that an oil shocks has lower long-run effect (weak persistent effect) on the India macroeconomy.