Oil price uncertainty and industrial production in oil-exporting countries

Abstract

This study documents the interdependence of oil price volatility on industrial production of emerging oil-exporting economies - Brazil, Mexico and 35 OECD countries (as proxy for the world). We used the oil price of West Texas Intermediate (WTI) for the price of oil and industrial production indices for economic activity or real output. The study used dynamic conditional correlation – generalized autoregressive conditional heteroskedasticity (DCC-GARCH) and corrected, cDCC-GARCH models for symmetric estimation and employs GJR-GARCH for asymmetric estimation. Bry and Boschan (1971) monthly (BBM) nonparametric dating for peaks and troughs of business cycles were obtained for industrial production of the countries under study. Results from DCC and cDCC parameters reveal that the dynamic linkages between oil price and industrial production (IP) in Brazil in Brazil and Mexico persistently co-move and the interdependence between oil price and IP of the world is temporary. The symmetric and asymmetric estimation results show that past news and lagged volatility depict a significant influence on the current conditional volatility of the variables. The study also reports that the corrected cDCC-GARCH truly endorses DCC-GARCH estimates and further reveals that the GJR-GARCH asymmetric model outperforms the symmetric GARCH models. The study, therefore, recommends that Brazil and Mexico should diversify their economies and heavily venture into non-oil exports for alternate revenues.