FORWARD MARKETS AND CHANGES IN MACROECONOMIC PERFORMANCE - THE CASE OF OIL

The relationship between oil price shocks and macroeconomic performanc e may have weakened over the past two decades as a result of the growi ng use of forward markets in oil and a changing role for oil inventori es in risk management. To demonstrate this, the paper develops a theor etical model of the macroeconomy under different oil market structures , and shows how changes in oil inventory decisions may have led to a d eclining oil price-GNP multiplier. The analysis relies on a simple neo classical model of an open economy with fixed exchange rates that is s ubjected to a temporary change in the price of an imported intermediat e good, oil. Simple calculations demonstrate that models not accountin g for the growth of forward markets may overstate the short-term oil p rice-GNP multiplier by a factor of two.