DO OIL PRICE SHOCKS MATTER TO CONSUMERS IN ZAMBIA? AN SVAR APPROACH

Abstract

This study investigated the impact of decomposed oil price shocks on household consumption in Zambia from 1985-2019. A structural Vector Autoregressive Model (SVAR) was used to measure the contemporaneous impact of oil price shocks on household consumption, and was complemented by Impulse Response Functions (IRFs), Granger Causality Tests and Forecast Error Variance Decompositions (FEVD). The existence of long-run relationships was determined by cointegration tests. The findings revealed that oil price shocks neither had short-run nor long-run impacts on consumption at the 5% level. Notwithstanding, it was found that oil-specific demand granger-causes consumption and that oil-specific demand shocks were attributed for the largest variation in consumption i.e. 6.5%. The findings implied that historic fuel subsidies insulated consumers from the adverse effects of oil price shocks. Therefore, the Zambian Government should introduce smart, optimal energy subsidies which have a less distortionary effect on its fiscal position. KEYWORDS - Oil Price Shocks, Structural Vector Autogressive Model, Forecast Error Variance Decomposition, Consumption, Impulse Response Functions, Granger Causality, Zambia