Do Oil Price Shock Affect Household Consumption? -Evidence from five OECD Countries

Abstract: International oil prices have been fluctuating a lot since decades. Since oil is an important component influencing global indicators, it is also important to evaluate to what extent consumer spending is affected in the aftermath of oil price shocks. Thus the paper addresses whether international oil price change has any impact on consumer spending in the long and short run. To conduct this study, five OECD nations were chosen, classifying each into oil importing and exporting countries; Canada, Germany, Sweden, UK, and USA. Applying the empirical methodology of Vector Autoregressive Model (VAR), we find evidence that international oil price shocks have significant impact on the consumer spending in the short-run. The analysis is performed with two set of specification for oil: ‘Oil price change’ and ‘Net oil price increase’ and the main tool used for diagnosis is Forecast Error Variance Decomposition (FEVD) and Impulse Response Functions (IRF). The results are strongly significant for Canada and USA. There are mixed inferences for Sweden, Germany and UK which leads to inconclusive decision about the impact on these countries. However, in general our empirical work supports the evidence that oil price have some predictive power in influencing consumption decision across oil-importing and oil-exporting countries.