The Effects of Oil Price Shocks: A Dynamic SVAR Analysis of the Terms of Trade, Industrial Production, and Inflation

Abstract

This study investigated the impact of the oil price, alongside the exchange rate and wages, on essential macroeconomic indicators in Germany, specifically the terms of trade, industrial production, and inflation. Considering Germany's export-driven economic structure and its strategic commitment to sustainable energy, it was important to ascertain whether fluctuations in the oil price significantly influenced macroeconomic factors. A structural vector autoregression (SVAR) model was employed to conduct a dynamic analysis using variance decomposition and impulse response functions. The results highlighted the critical role of the oil price in shaping macroeconomic outcomes. Variance decomposition findings revealed that oil price shocks significantly contributed to fluctuations in the terms of trade, industrial production, and inflation. These impacts remained consistent over time, confirming the structural significance of the energy price in Germany's macroeconomic landscape. Impulse response functions showed that increases in the oil price had a significant positive effect on inflation and industrial production, while simultaneously exerting a negative and statistically significant impact on the terms of trade. The exchange rate exhibited a comparatively stronger influence on macroeconomic fluctuations, particularly in shaping the dynamics of the terms of trade. Overall, the findings indicated that while monetary and fiscal policies could be utilized to control inflation, enhance industrial production, and influence trade terms, the oil price constituted an exogenous variable. This underscored the need for comprehensive energy strategies aimed at reducing reliance on fossil fuel sources and strengthening macroeconomic resilience against external energy shocks.