Oil price volatility, fiscal policy and economic growth: a panel vector autoregressive (PVAR) analysis of some selected oil‐exporting African countries

Abstract

AbstractFiscal policy in oil‐centred economies is facing specific challenges, both in the long run, as regards intergenerational equity and fiscal sustainability, and in the short run, as regards macroeconomic stabilisation and fiscal planning. Specifically, fiscal policy in most oil‐exporting countries in Africa has been expansionary over the past years in the wake of high oil prices. Fiscal expansion has added to inflationary pressure, and monetary policy has been constrained in tackling inflation as a result of prevailing exchange rate regimes. The sharp fall in oil prices since mid‐2008 has brought to the fore a different question—whether oil exporters in Africa can sustain spending levels reached in previous years. The study makes use of quarterly data that span between 1990:q1 and 2010:q4. A panel vector autoregressive technique was employed to examine the impact of oil price volatility on economic performance of five oil‐exporting countries in Africa. The countries are Algeria, Angola, Egypt, Libya and Nigeria. In order to study the responses of shocks, the study identifies oil price volatility, real gross domestic product (real GDP), fiscal deficit, gross investment and money supply shocks by ordering the variables in this way and using a standard Choleski factorisation. The impulse response function's result shows that of all the macroeconomic variables considered, gross investment respond more effectively to oil price volatility. However, the responses of fiscal deficit, real GDP and money supply are less effective. Overall, these findings suggest that gross investment is the main route through which volatility in oil price influenced the real sector of these economies.