The Macroeconomic Effects of Oil Price Shocks: Empirical Evidence for India

Kumar, Surender

doi:10.2139/ssrn.900285

Cited by 21 publications

(30 citation statements)

References 24 publications

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“…In the presence of sectoral imbalances, an increase (decrease) in oil price would require contraction (expansion) of oil intensive sectors and expansion (contraction) of oil efficient sectors [Lilien (1982) and Hamilton (1988)]. These realignments in production require adjustments, which cannot be achieved in the short run-known as dispersion hypothesis [Kumar (2009)]. Furthermore, asymmetry in oil prices will result in under-utilisation of resources and rising unemployment.…”

Section: Fig 1 Transmission Channels Of Oil and Food Shocksmentioning

confidence: 99%

Macroeconomic Effects of Global Food and Oil Price Shocks to the Pakistan Economy: A Structural Vector Autoregressive (SVAR) Analysis.

Khan¹,

Ahmed²

2022

pdr

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This study examines the transmission channels through which the global food and oil price shocks affects selected macroeconomic variables including inflation rate, output, money balances, interest rate and real effective exchange rate for Pakistan using monthly data over the period 1990M1-2011M7. An empirical analysis is carried out by employing structural vector autoregressive (SVAR) framework. Generalised Impulse Response Functions and Generalised Forecast Variance Decompositions are employed to track the impact of oil and food price shocks to Pakistan‘s economy. Results suggest that oil price shock affects industrial production, appreciates real effective exchange rate negatively and affect inflation and interest rate positively. Whereas, following food price shocks, industrial output increases. Similarly, interest rate and inflation rate responds positively following food price shocks. However, the variation in interest rate due to food price shock is relatively larger than that of oil price shocks. Generalised impulse response functions reveal that real effective exchange rate is most important source of disturbances following either oil price or food price shocks. Generalised forecast variance decompositions analysis also supports the findings based on generalised impulse response functions. The result clearly reveals that oil and food price shocks significantly affect output, short-term interest rate, inflation rate and real effective exchange rate. However, among all, real effective exchange rate has seen a dominant source of variations in Pakistan. This implies that supply-side and demand-side disturbances originated by external shocks are the major sources of inflation (stagflation) in Pakistan. Keywords: Oil and Food Price Shocks, SVAR, GIRFs, GFEVDs, Pakistan

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Section: Fig 1 Transmission Channels Of Oil and Food Shocksmentioning

confidence: 99%

Macroeconomic Effects of Global Food and Oil Price Shocks to the Pakistan Economy: A Structural Vector Autoregressive (SVAR) Analysis.

Khan¹,

Ahmed²

2022

pdr

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“…The selection of effective oil prices is difficult as it has the influence of pricecontrols, high and varying taxes on petroleum products, exchange rate fluctuations and the variations in the domestic consumer price index [Cunado, et al (2005)]. Most of the empirical literature which analyse the effect of oil price shocks in different economies use either the world price of crude oil (in $ US) divided by the consumer price index in the US [e.g., Hsing (2007); Gounder and Bartleet (2007); Burbidge and Harrison (1984)], while some studies have used world oil price converted into respective country's currency by means of the market exchange rate [Mork, et al (1994); Abeysinghe (2001); Kumar (2005)]. The main difference between the two variables is that only the second one takes into account the differences in the oil price that each country faces due to its exchange rate fluctuations or its inflation levels.…”

Section: Methodology and Data Issuesmentioning

confidence: 99%

“…Rafiq, et al (2008) examined the impact of oil price volatility on key macroeconomic indicators of Thailand. Kumar (2005) assessed the oil price macro economy relationship for India. Cunado, et al (2005) focused on six Asian countries including Thailand, Singapore, South Korea, Malaysia, Phillipines and Japan and studied the impact of oil price shocks on both economic activity and consumer price indexes.…”

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confidence: 99%

Crude Oil Price, Monetary Policy and Output: The Case of Pakistan

Malik¹

2022

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Rapid rises in the prices of crude oil in the decade of 2000s have raised concerns among policy-makers around the world, as the theoretical and empirical literature has established that oil price shocks may have an adverse impact on the macro economy of the country. In particular, for the oil importing developing countries like Pakistan, this upward trend in the price of oil can have serious repercussions in terms of creating inflationary pressures in the economy, increasing budget deficit and balance of payment problems, and thus affecting the GDP growth. Pakistan was on the path of rising GDP growth in the first seven years of this decade. But in the year 2007-08, the situation has changed. This oil price shock could possibly be one of the reasons. As an impact of rising growth rate of GDP, demand for energy has also gone up rapidly in this period. In the energy mix for the year 2005-06, oil accounts for 32 percent of the total energy used in Pakistan, and it is the second largest source of energy used after natural gas, which accounts for 39 percent. With oil being the second largest source of energy used along with almost constant rate of its production Pakistan is heavily dependent on oil imports from Middle East exporters (Saudi Arab playing the lead role). Almost 82 percent of the demand for petroleum products in the country is met through imports.1 Pakistan spent about 44 percent of export earnings on oil imports in 2006-07. This percentage was only 27 percent in 2004-05. Therefore, the international oil price increase has a direct impact on the macro economy of the country, especially on the oil price GDP relationship. The share of net oil imports in GDP is an indicator of the relative importance of the oil price rise to the economy in terms of the potential adjustments needed to offset it. For Pakistan over the last few years, this ratio has risen from 3.13 in 1990-91 to -5.24 in 2005-06 [Malik (2007)]. With such a high ratio, unless country is running in surplus, or has extremely large foreign exchange reserves, high oil price is dealt by severe macro economic adjustments.

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“…According to the supply‐side effect, rising oil prices are indicative of the reduced availability of a basic input to production, leading to a reduction of potential output (Lardic and Mignon, ). Consequently, there is an increase in the marginal costs of production and the growth of output and productivity are slowed (Lescaroux and Mignon, , Kumar, ; Tang et al ., ). The decline in productivity growth negatively affects real wages and increases unemployment (Kumar, ; Chuku et al ., ).…”

Section: The Transmission Channels Of Oil and Food Pricesmentioning

confidence: 99%

Revisiting the macroeconomic effects of oil and food price shocks toPakistan economy: a structural vector autoregressive (SVAR) analysis

Khan

Ahmed

2014

OPEC Energy Review

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This study examines the impact of global food and oil price shocks and their transmission channels to the selected macroeconomic variables including the inflation rate, output, money balances, interest rate and real effective exchange rate for Pakistan using monthly data over the period 1990M1-2011M7. An empirical analysis is carried out by employing a structural vector autoregressive framework to identify different structural shocks and explore the relative contribution of oil and food price shocks. Generalised impulse response functions and generalised forecast variance decompositions are employed to track the impact of oil and food price shocks on Pakistan's economy. The results suggest that oil price shocks negatively affect industrial production, appreciates real effective exchange rate and positively affect inflation, either the shocks are positive or negative. Only the oil and food price shocks have asymmetric impact on the short-term interest rate. In contrast, following the positive (or negative) food price shock, industrial output, interest rate and inflation rate respond positively. However, the variation in interest rate due to food price shock is relatively larger than that of oil price shocks. Generalised impulse response functions reveal that real effective exchange rate is the most important source of disturbances following either oil price or food price shocks. Generalised forecast variance decompositions analysis also supports the findings based on generalised impulse response functions. The results clearly reveal that oil and food price shocks significantly affect output, short-term interest rate, inflation rate and the real effective exchange rate. However, among all, real effective exchange rate has been a dominant source of variation in Pakistan. This implies that supply-side and demand-side disturbances originated by external shocks are the major sources of variation in output and inflation in Pakistan.

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The Macroeconomic Effects of Oil Price Shocks: Empirical Evidence for India

Cited by 21 publications

References 24 publications

Macroeconomic Effects of Global Food and Oil Price Shocks to the Pakistan Economy: A Structural Vector Autoregressive (SVAR) Analysis.

Macroeconomic Effects of Global Food and Oil Price Shocks to the Pakistan Economy: A Structural Vector Autoregressive (SVAR) Analysis.

Crude Oil Price, Monetary Policy and Output: The Case of Pakistan

Revisiting the macroeconomic effects of oil and food price shocks toPakistan economy: a structural vector autoregressive (SVAR) analysis

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