Connectedness analysis of oil price shocks, inflation, and exchange rate for the MENA region countries

Abstract

The relation among energy prices, exchange rates and inflation has been perturbed in the recent past by both the COVID-19 shock, which resulted in a sharp downturn of the economic activity at the beginning of 2020 and the Ukraine crisis, which resulted in sharp increase in energy prices and then inflation at the beginning of 2022. This is the first paper to analyze this relation for the MENA region, conducting an empirical estimation of a VARX model on monthly data from Jan 2010 to Dec 2022 for the main 11 MENA countries. The model includes asymmetric effects, a detailed contagion analysis, conducted with the methodology à la Pesaran - Pick (2007) to identify periods of high volatility, and presents a spillover analysis à la Diebold - Yılmaz (2014), used to measure the connectedness of the three main variables.The novelties of the paper are the construction of a country specific oil portfolio; the asymmetric analysis of oil shocks and contagion; the measurement of the general impulse response spillover, to ascertain the intensity and direction of volatility spillovers. The empirical results show that: (i) the specific oil prices considered for each country induce different effects; (ii) the oil price changes effect depends on the direction and period of the shock; (iii) there are asymmetric contagion effects for exchange rate and inflation only for some countries. Finally, some policy implications are presented based on the spillover connectedness analysis, especially considering the post Covid period.