Asymmetric behavior of oil price shocks and output performance in Africa

Abstract

A comprehensive cross-country dataset is employed in this reseach to examine the impact of oil price shocks and its asymmetry on output in African oil exporting countries (AOECs). Using a panel-VAR model, the study accounted for impulse-response between output and oil price shocks. In addition, through the PVAR model, variance decom-position is performed to assess the importance of those effects and guidelines are offered for policy formation. The study revaled that oil price shocks create heterogeneously asymmetric effect on output. The study revealed the prevalence of Dutch Disease among the AOECs as apparent in the impact of negative oil price shocks on exchange rates and output. The study recommends that policies should be formulated to minimize the effect of oil price shocks on output, especially negative oil price shocks revealed to adversely affect oil revenue (policies aimed at strengthening economic activities through diversification, so as to enhance the export mix). This will reduce the AOECs’ on-going reliance on large revenues from oil, arising from positive oil price shocks which the literature has argued to have a negative and hindering impact on economy, mainly because it impacts the non-oil sector.