The dynamics of economic growth, oil prices, stock market depth, and other macroeconomic variables: Evidence from the G-20 countries

a r t i c l e i n f o JEL classification: C33 G10 O49 Q43 Keywords: Oil prices Stock market depth Economic growth Other macroeconomic variables Panel VAR Granger causality G-20 countries This paper examines the linkages between economic growth, oil prices, depth in the stock market, and three other key macroeconomic indicators: real effective exchange rate, inflation rate, and real rate of interest. We employ a panel vector autoregressive model to test Granger causality for the G-20 countries over the period 1961– 2012. A novel approach to this study is that we clearly demarcate the long-run and short-run relations between the economic variables. The results show a robust long-run economic relationship between economic growth, oil prices, stock market depth, real effective exchange rate, inflation rate, and real rate of interest. In the long run, real economic growth is found to respond to any deviation in the long-run equilibrium relationship that is found to exist between the different measures of stock market depth, oil prices, and the other macroeconomic variables. In the short run we find a complex network of causal relationships between the variables. While the empirical evidence of short-run causality is mixed, there is clear evidence that real economic growth responds to various measures of stock market depth, allowing for real oil price movements and changes in the real effective exchange rate, inflation rate, and real rate of interest. Oil is a non-renewable and strategic commodity, vital to the growth of all economies. Most G-20 countries, which have high oil consumption , are net oil importers. Therefore, as such, they pay close attention to oil prices, their own macroeconomic indicators (including economic growth), as well as their exchange rates against the US dollar — the international currency of oil. The purpose of this paper is to examine the linkages between real economic growth and real oil prices in the presence of three other key macroeconomic indicators of a modern economy which operate adjacently: the real effective exchange rate, the inflation rate, and the real rate of interest. We also investigate the significance of stock market depth as an additional variable which may affect and be affected by economic growth and the other macroeconomic variables that we consider in this study. Since the concept of stock market depth is fairly broad, 1 we use three different indicators to characterize depth in the stock market: market capitalization (MAC), …