Asymmetric Impacts of International Oil Shocks on Domestic Growth Rate and Inflation

Abstract

Oil shocks are unobserved variables. The impacts of oil shocks on macroeconomic variables may be different on how they are defined. Oil shocks are defined as both a price and an oil production shortfall criterion. This paper seeks to compare and analyze the impacts that oil shocks as defined by these criterion, have on macroeconomic variables, such as, domestic economic growth and inflation. In particular, the asymmetric response of macroeconomic variables to the nature of oil shocks is investigated. Multivariate structural VAR analysis is carried out using both linear and nonlinear models. The latter category includes three approaches employed in the literature, namely, the asymmetric, scaled and net specifications. Empirical analysis shows that oil price shocks have an asymmetric effect on macroeconomic variables. In the case of oil price increase shocks, it reduces economic growth and increases the inflation rate, but oil price decrease shocks do not have any significant effects on these variables. The elasticity of economic growth against oil price increase shocks is -0.05%, while that against the inflation rate is 0.081%. But oil production shortfall shocks do not have an asymmetric effect on macroeconomic variables. Oil production shortfall shocks in both increases and decreases have no effect on economic growth, but do have a symmetric effect in both positive and negative oil production shortfall shocks on the rate of inflation. The elasticity of inflation rate for positive oil production shortfall shocks was at most 0.015% and for negative oil production shortfall shocks was at most -0.01%.