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

Abstract

AbstractStudies 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.