A nonlinear autoregressive distributed lag analysis on the macroeconomic effect of global oil price in the Philippines

Abstract

Studies have pointed out that oil price volatility influenced economic output and growth among developing and net oil‐importing countries. More than a quarter of the Philippines’ energy demand depends on crude oil, and 99% of the crude oil demand is imported mainly from the Middle East. This study was conducted to determine if there is a nonlinear or asymmetric output response to oil price movements and examine which economic sector in the Philippines is the most vulnerable to oil shocks. This contributes to the literature for a case of developing, oil importing, inflation targeting and post‐oil industry deregulated economy. A nonlinear autoregressive distributive lag model was applied to observe quarterly data from 1998:Q1 to 2019:Q4 of the relevant economic variables. Results revealed an asymmetric effect of non‐oil variables on sectoral performance. World oil prices affect economic sector outputs symmetrically or linearly. The service sector is found to be the most vulnerable sector to oil price shocks. The absence of asymmetry can be attributed to increased competition in the Philippines’ domestic oil industry brought about by oil market deregulation. Improving the energy mix and reducing oil intensity is vital to offset any oil price shock transmission to an oil‐importing economy like the Philippines.

Central Bank Independence and Oil Prices Impact on Macroeconomic Indicators

“…Higher oil prices, while increasing production costs, also generally reduced economic growth rates in developed and post-Soviet countries in all combinations with the GMT and CWN indices and their subindices in equation ( 1). These results are consistent with findings, for example, in (Wu et al, 2018;Luqman et al, 2019;Lawal et al, 2020;Raggad, 2021;Deluna et al, 2023).…”

“…Small oil importers take the price as given, and high oil prices in these countries are associated with low economic growth. When oil and gas prices rise, production costs increase, resulting in decreased economic growth (Wu et al, 2018;Luqman et al, 2019;Lawal et al, 2020;Deluna et al, 2023;Tala and Hlongwane, 2023). Large countries are less susceptible to oil price shocks affecting global oil markets.…”

“…Moghaddam (2023) also points out the heterogeneous impact of oil price changes on Canadian provinces' economic growth. Studies by Deluna et al (2023) show that oil price volatility affects economic growth in developing and oil-importing countries, with oil prices affecting output symmetrically or linearly.…”