Revisiting the Nexus Between Oil Prices and Economic Activity for Asian Economies Using MIDAS

Abstract

The objective of this paper is to re-examine the causal relationship between oil prices and economic activity for five Asian economies. We apply the unrestricted MIDAS (U-MIDAS) model using monthly data for real oil prices and quarterly data for real GDP for the period from 1998Q1 to 2019Q4. The causal nexus between oil prices and economic activity is also studied by means of wavelet analysis to investigate whether the relationship between the variables changes over different time scales. The key empirical results under the MIDAS approach show that there is a clear significant causal link from oil prices to economic activity, which is not as clearly found under the standard VAR approach. In addition, our results using impulse response functions suggest that the five Asian economies respond, in general, positively in economic activity to an oil price shock at shorter time horizons (less than two years), while the positive responses switch to mostly negative ones at longer time horizons (from two to four years). Our results, in general, support that the (theoretically) expected negative causal nexus between oil price fluctuations and economic activity for oil importers is dominant over longer time horizons for our dataset. An exception to this pattern is China, which has a dissimilar country profile in terms of its oil market and production structure from the profiles of the other Asian economies in the study. JEL Classification: C32, E32, O53, Q43