Oil price fluctuations and their impact on the macroeconomic variables of Kuwait: a case study using a VAR model

Abstract

SUMMARYIn this study, a vector autoregression model (VAR) and a vector error correction model (VECM) were estimated to examine the impact of oil price #uctuations on seven key macroeconomic variables for the Kuwaiti economy. Quarterly data for the period 1984}1998 were utilized. Theoretically and empirically speaking, VECM is superior to the VAR approach. Also, the results corresponding to the VECM model are closer to common sense.However, the estimated models indicate a high degree of interrelation between major macroeconomic variables. The empirical results highlight the causality running from the oil prices and oil revenues, to government development and current expenditure and then towards other variables. For the most part, the empirical evidence indicates that oil price shocks and hence oil revenues have a notable impact on government expenditure, both development and current. However, government development expenditure has been in#uenced relatively more.The results also point out the signi"cance of the CPI in explaining a notable part of the variations of both types of government expenditure. On the other hand, the variations in value of imports are mostly accounted for by oil revenue #uctuations and then by the #uctuation in government development expenditures. Also, the results from the VECM approach indicate that a signi"cant part of LM2 variance is explained by the variance in oil revenue. It reaches about 46 per cent in the 10th quarter, even more than its own variations.

The effects of oil price shocks on the Iranian economy

“…In this literature, net oil exporting countries are the center of interest. Eltony and Al-Awadi (2001) found evidence that symmetric oil price shocks are important in explaining fluctuations in macroeconomic variables in Kuwait. Their results showed the importance of oil price shocks on government expenditures, which are the major determinant for the level of economic activity in Kuwait.…”

Does the source of oil price shocks matter for South African stock returns? A structural VAR approach

“…An extensive macroeconomic literature suggests a strong negative link between oil prices and real variables, especially for oil-importing countries (see e.g,. Hamilton, 1983;Hamilton 2003;Hooker, 1996;Eltony andAl-Awadi, 2001 andKeane andPrasad, 1996, amongst others). Hamilton (1983) points out that 10 of the 11 postwar economic downturns have been immediately preceded by a significant rise in oil prices.…”

Exploring the impact of oil revenues on OPEC members' macroeconomy

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