This chapter discusses leading problems linked to energy that the world is now confronting and to propose some ideas concerning possible solutions. Oil deserves special attention among all energy sources. Since the beginning of 1981, it has merely been continuing and enhancing the downward movement in consumption and prices caused by excessive rises, especially for light crudes such as those from Africa, and the slowing down of worldwide economic growth. Densely-populated oil-producing countries need to produce to live, to pay for their food and their equipment. If the economic growth of the industrialized countries were to be 4%, even if investment in the rational use of energy were pushed to the limit and the development of nonpetroleum energy sources were also pursued actively, it would be extremely difficult to prevent a sharp rise in prices. It is evident that it is absolutely necessary to pursue actively the development of coal, natural gas, and nuclear power if a physical shortage of energy is not to block economic growth.

World energy outlook

The Council and the European Parliament

Recently developed structural models of the global crude oil market imply that the surge in the real price of oil between mid-2003 and mid-2008 was driven by repeated positive shocks to the demand for all industrial commodities, reflecting unexpectedly high growth mainly in emerging Asia. This note evaluates this proposition using an alternative data source and a different econometric methodology. Rather than inferring demand shocks from an econometric model, we utilize a direct measure of global demand shocks based on revisions of professional real GDP growth forecasts. We show that recent forecast surprises were associated primarily with unexpected growth in emerging economies (and to a lesser extent in Japan), that markets were repeatedly surprised by the strength of this growth, that these surprises were associated with a hump-shaped response of the real price of oil that reaches its peak after 12 to 16 months, and that news about global growth predict much of the surge in the real price of oil from mid-2003 until mid-2008 and much of its subsequent decline.

Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003-2008?; Parenting Styles and Financial Security: How are children impacted?

It has been documented that retail gasoline prices respond more quickly to increases in wholesale price than to decreases. However, there is very little theoretical or empirical evidence identifying the market characteristics responsible for this behavior. This paper presents a new theoretical model of asymmetric adjustment that empirically matches observed retail gasoline price behavior better than previously suggested explanations. I develop a “reference price” consumer search model that assumes consumers’ expectations of prices are based on prices observed during previous purchases. The model predicts that consumers search less when prices are falling. This reduced search results in higher profit margins and a slower price response to cost changes than when margins are low and prices are increasing. Following the predictions of the theory, I use a panel of gas station prices to estimate the response pattern of prices to a change in costs. Unlike previous empirical studies I focus on how profit margins (in addition to the direction of the cost change) affect the speed of price response. Estimates are consistent with the predictions of the reference price search model, and appear to contradict previously suggested explanations of asymmetric adjustment.

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Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market - eScholarship

The European System of Central Banks

This report aims to analyse euro area energy markets and the impact of energy price changes on the macroeconomy from a monetary policy perspective. The core task of the report is to analyse the impact of energy price developments on output and consumer prices. Nevertheless, understanding the link between energy price fluctuations, inflationary pressures and the role of monetary policy in reacting to such pressure requires a deeper look at the structure of the economy. Energy prices have presented a challenge for the Eurosystem, as the volatility of the energy component of consumer prices has been high since the creation of EMU. At the same time, a look back into the past may not necessarily be very informative for gauging the likely impact of energy price changes on overall inflation in the future. For instance, the reaction of HICP inflation to energy price fluctuations seems to have been more muted during the past decade than in earlier periods such as the 1970s.

Energy Markets and the Euro Area Macroeconomy

A well-documented empirical result is that market expectations extracted from futures contracts on the federal funds rate are among the best predictors for the future course of monetary policy. We show how this information can be exploited to produce accurate forecasts of bond excess returns and to construct profitable investment strategies in bond markets. We use a tilting method for incorporating market expectations into forecasts from a standard term-structure model and then derive the implied forecasts for bond excess returns. We find that the method delivers substantial improvements in out-of-sample accuracy relative to a number of benchmarks. The accuracy improvements are both statistically and economically significant and robust across a number of maturities and forecast horizons. The method would have allowed an investor to obtain positive cumulative excess returns from simple "riding the yield curve" investment strategies over the past ten years, and in this respect it would have outperformed its competitors even after accounting for a risk-return tradeoff.

Bond returns and market expectations

A well-documented empirical result is that market expectations extracted from futures contracts on the federal funds rate are among the best predictors for the future course of monetary policy. We show how this information can be exploited to produce accurate forecasts of bond excess returns and to construct profitable investment strategies in bond markets. We use an exponential tilting method for incorporating market expectations into forecasts from a standard term-structure model and then derive the implied forecasts for bond excess returns. We find that the method delivers substantial improvements in out-of-sample accuracy relative to a number of benchmarks. The accuracy improvements are both statistically and economically significant for bond maturities of up to two years and forecast horizons less than one year, and would have allowed an investor to obtain positive cumulative excess returns from simple "riding the yield curve" investment strategies over the past ten years. For long forecast horizons and bond maturities of four or five years, the preferred forecast is instead one implied by a simple autoregressive model.

/pdf/bond-returns-and-market-expectations-3g10nh75ej.pdf

We employ a Bayesian approach to analyze financial markets experimental data We estimate a structural model of sequential trading in which trading decisions are classified in five types: private-information based, noise, herd, contrarian and irresolute Through Monte Carlo simulation, we estimate the posterior distributions of the structural parameters This technique allows us to compare several non-nested models of trade arrival We find that the model best fitting the data is that in which a proportion of trades stems from subjects who do not rely only on their private information once the difference between the number of previous buy and sell decisions is at least two In this model, the majority of trades stem from subjects following their private information There is also a large proportion of noise trading activity, which is biased towards buying the asset We observe little herding and contrarianism, as theory suggests Finally, we observe a significant proportion of (irresolute) subjects who follow their own private information when it agrees with public information, but abstain from trading when it does not

/pdf/a-bayesian-approach-to-experimental-analysis-trading-in-a-hmutdiaoy3.pdf

Riccardo Costantini

Papers

Energy Markets and the Euro Area Macroeconomy

Bond returns and market expectations

Bond returns and market expectations

A Bayesian approach to experimental analysis: trading in a laboratory financial market