Oil (Gas) Prices and Economic Activity in Selected European Countries – Evidence from Time and Frequency Domain Causality

The effects of oil and gas prices on economic activity are still being investigated, as oil and gas are critical inputs in the production process. This study aims to examine the relationship between oil (gas) prices and economic activity—represented by fundamental macroeconomic variables (gross domestic product, inflation, and exchange rate)—in both the time domain and frequency domain in three selected countries (Germany and Poland as net oil importers and Norway as a net oil exporter) for the period 1995Q1–2021Q3. For this purpose, the causal effects of oil and gas prices on these macroeconomic variables are first examined using the conventional Granger causality test in the time domain and then the Breiutung-Candelon test in the frequency domain—performed separately for the long-, business cycle, medium- and short-term components. The empirical findings demonstrate substantial differences in the causal patterns between oil (gas) prices and macroeconomic variables in the time and frequency domain but also across the selected countries. In Germany and Poland, the total time domain transmission mechanism is dominated by long-term, business cycle, and medium-term causal relationships; however, in Germany specifically, shocks in oil prices are transmitted on the economy through inflation and exchange rate channels, while, in Poland, these are only through an inflation channel. In the case of Norway, the total time domain transmission mechanism is dominated by medium- and short-term causal patterns, with inflation and exchange rate channels transmitting oil and gas price changes on the economy. These results suggest that the predictive power in Germany and Poland is at slowly fluctuating components, while, in Norway, it is rather at quickly fluctuating components