Oil prices and global factor macroeconomic variables

- Global output, global CPI and global M2 monetary aggregate are cointegrated.
- Tightening global monetary policy is linked with falling output, CPI and oil prices.
- Positive shock to global liquidity raises global output, CPI and world oil prices.
- A rise in world oil price results in significant increases in global interest rates.
- Positive shocks to global M2, global CPI and global output raise world oil prices.

This paper investigates the relationship between oil prices, global industrial production, prices, central bank policy interest rate and monetary aggregate with a global factor-augmented error correction model. We confirm the following stylized relationships: i) at global level, money, industrial production and prices are cointegrated; ii) positive innovation in global oil price is connected with global interest rate tightening; iii) positive innovation in global money, price level and industrial production is connected with an increase in oil prices; iv) positive innovations in global interest rate are associated with a decline in oil prices; and v) the U.S., Euro area and China are the main drivers of global macroeconomic factors.