Oil paradox

One of the biggest puzzles in recent times is why the sharp oil price decline hasn’t benefited the global economy


One of the biggest puzzles in recent times is why the sharp oil price decline has not benefited the global economy.

Senior International Monetary Fund economists have come up with an interesting explanation. The collapse of global prices in effect raised real interest rates. The argument is as follows. Lower oil prices have brought down inflation at a time when nominal interest rates are stuck at zero. So there is no scope for central banks to reduce nominal interest rates in response to lower inflation. Thus, economic growth has not improved, even in oil-importing nations.

Indian interest rates are not at zero. So this explanation is more applicable to rich nations. What about India? One possibility is that slower global growth has hurt exports. There are also signs that Indians in oil-producing countries are sending less money home because their incomes have been squeezed by the drop in oil prices. In short, it is all more complicated than earlier assumed.