Oil Price Fluctuations and Current Accounts in Oil-Importing Countries: The Role of Financial Development

Abstract

Recent empirical studies provide evidence that financial deepness or the lack thereof plays a significant role in the oil price-current account nexus for oil-exporting countries. While oil price fluctuations are known to negatively impact the current account positions of net oil-importing countries, their experience in relation to the level of financial development remains largely unaddressed in the literature. Relying on panel smooth transition regressions, this paper examines whether heterogeneous levels of financial development matter in explaining the sensitivity of current account to oil price fluctuations for a panel of 46 net oil-importing countries. The results show that the negative effect of oil price fluctuations on current accounts is non-linear and crucially depends on the degree of financial development of oil-importing countries. Specifically, oil price fluctuations exert a weaker impact on the current account position of more financially developed countries, this influence intensifies for less financially developed countries.