The Impact of Oil Shocks in a Small Open Economy New-Keynesian Dynamic Stochastic General Equilibrium Model for an Oil-Importing Country: The Case of South Africa

Abstract

This paper studies the effects of foreign (real) oil price shocks on key macroeconomic variables for South Africa: a net-importer of oil. We develop and estimate a small open economy new-Keynesian dynamic stochastic general equilibrium model with a role for oil in consumption and production. The substitutability of oil for capital and consumption goods is low, import price pass-through is incomplete, domestic and foreign prices and wages are sticky, and the uncovered interest rate parity condition holds imperfectly. Foreign real oil price shocks have a strong and persistent effect on domestic production and consumption activities and, hence, are a fundamental driver of output, inflation and interest rates in both the short-and long-run. Oil price shocks also generate a tradeoff between output and inflation stabilisation. As a result, episodes of endogenous tightening of monetary policy slow the recovery of South Africa's real economy. Our findings go further to suggest an important role for oil prices in predicting the South African output during and after the recession that followed the 2008 global financial crisis.

Oil Price Shocks, Fuel Subsidies and Macroeconomic (In)stability in Nigeria

“…Finally, the historical decomposition of interest rate over the sample period is shown in Figure 4. Similar to the findings of Hollander et al (2018) for the South-African economy, our results indicate that monetary policy and domestic supply (largely risk premium) shocks play non-trivial roles in the evolution of the nominal interest rate in Nigeria. Also, external shocks (i.e.…”

“…The estimated Taylor rule indicates that the Central Bank of Nigeria (CBN) has been quite hawkish while also keeping an eye on output and the exchange rate. The CBN's reaction coefficient on inflation ( ) is estimated at 2.86, which is substantially higher than the prior (1.50), the 1.45 obtained by Iklaga (2017) and 1.405 estimated for an oil-importing economy of South Africa by Hollander et al (2018). At = 0.12, output considerations carry a higher weight in the Taylor rule than exchange rate ( = 0.11).…”

The impacts of structural oil shocks on macroeconomic uncertainty: Evidence from a large panel of 45 countries

“…The macroeconomic effects of oil price shocks have been widely studied in the literature since the seminal work of Hamilton (1983). It is well established that oil shocks are closely associated with a number of macroeconomic and financial variables, including employment, aggregate output, inflation, stock returns and exchange rates (see, e.g., Chisadza et al, 2016;Gkillas et al, 2020;Hollander et al, 2019;Kilian, 2009;.…”

Economic Development and South Africa: 25 Years Analysis (1994 to 2019)

“…Different writers have individual opinions with respect to the economic development of a nation. It is also said that economic development happens when resources of any nation are deployed into productive products and services (Gupta et al ., 2010; Meyer and Meyer, 2015; Abrahams, 2018; Acemoglu et al ., 2019; Hatemi‐J et al ., 2019; Hollander et al ., 2019). Economic development is of utmost important for the budding nations because they are more vulnerable with respect to poverty, corruption and unemployment (Santiago and Rossiter, 1985; Rogerson, 2004; Van Der Merwe and Burns, 2008; Muchapondwa and Sterner, 2012; Andrés and Asongu, 2013; Chisadza and Bittencourt, 2019).…”

“…(Gupta and Ziramba, 2009; Gupta and Kabundi, 2010; Gupta et al ., 2011; Gupta and Modise, 2012, 2013; Gupta et al ., 2013; Bekiros et al ., 2016; Gupta et al ., 2018; Hatemi‐J et al ., 2019; Hollander et al ., 2019)…”