**Benchmark model.** In this model, consists of year-on-year changes in log real crude oil prices (global variable), log real natural gas prices (global variable), log real coal prices (global variable), log real GDP tt (country-specific variable), and current account balance as percentage of GDP (country-specific variable). zz We follow a similar ordering of variables as in earlier models, where growth rates of real natural gas prices and real coal prices are, respectively, ordered right after real oil prices growth and right before countryspecific real GDP growth. The motivation behind this ordering is due to the market share of these commodities in global energy exports, although we also consider an alternative ordering of these variables below.<sup>5</sup> All variables can impact other variables after one quarter.

**Robustness #1.** We check the robustness of the benchmark results to an alternative ordering of the energy price variables, where real coal prices are ordered before real natural gas prices. This way, we control for the possibility of real natural gas prices being immediately affected by shocks to real coal prices, although shocks to real natural gas prices can have an impact on real coal prices after one quarter. All other details are the same as in the benchmark model.

**Robustness #2.** As in Section 3.1, we check the robustness of the benchmark results to the inclusion of country-specific real effective exchange rates as an additional endogenous variable. We follow a similar ordering of variables as in the benchmark model, with the new real effective exchange rate variable ordered last, as it can be affected immediately by any changes in other variables. All other details are the same as in the benchmark model. As data for real effective exchange rates are not available for certain countries, this model is estimated individually for 29 EMDEs by using quarterly data.

# **3.3. Disentangling oil price shocks: Demand versus supply**

The earlier literature (with the exception of Kilian et al., 2009) generally treated oil price shocks as the same regardless of the source of the shock. More recently, there is growing recognition that the macroeconomic effects of supply and demand shocks in the crude oil market are different, depending on whether the oil price increase is caused by disruption in oil production, demand from global economic activity, or precautionary demand (Gnimassoun et al., 2017). There is empirical evidence that commodity prices in general, and oil prices in particular, are determined not only by supply side factors but also by demand-side factors related to the global business cycle (for example, Hamilton, 2009; Kilian, 2009; Alquist et al., 2013; Kilian and Murphy, 2014). Therefore, in this section, we examine the impact of oil price shocks on the current account while accounting for the source of the oil price fluctuations.

We distinguish between the effects of oil demand and oil supply shocks on current account balances by using data on both global oil prices and global oil production, where oil demand and oil supply shocks result in impulse responses of oil prices and oil production with different signs.<sup>6</sup> In technical terms, we use the algorithm introduced by Arias, Rubio-Ramirez, and Waggoner (2018) to search for 1,000 successful draws satisfying our sign restrictions. To allow an appropriate comparison with the models with recursive identification, the shock sizes (of oil demand and oil supply) are normalized such that they result in a 1 percent increase in real crude oil prices.

> 5 According to <u>https://www.worldstopexports.com/, the worldwide values of crude oil, natural gas, and coal exports in 2021 were</u> $982.6 billion, $374.6 billion, and $122.9 billion, respectively.

> 6 As data for production of natural gas and coal are not available in quarterly frequency for our sample period, the investigation is restricted to the effects of oil demand versus oil supply shocks on current account balances.

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