Oil price shocks versus quantitative easing An analysis of the Eurozone

This paper explores the effects of an oil price shock and exchange rate movements on the one hand, on the GDP and the unemployment rate of the Eurozone economy. Taking into account the ECB’s policy of quantitative easing and various control variables, we construct a vector error correction model to arrive at an estimate of both an oil price shock and the effect of quan-titative easing through the exchange rate on the aggregate economy, measured by GDP and the unemployment rate. We observe a J-curve effect from the Euro exchange rate to Eurozone GDP. We find that a negative oil price shock takes effect after three quarters, when its impact on GDP and unemployment rate is larger than the exchange rate effect of quantitative easing. We find no difference in the effect when we use either the real effective exchange rate or the nominal effective exchange rate.