The Dynamic Interplay between Oil Rents, Financial Innovation, and Economic Growth in OPEC Countries: Evidence from a Structural VAR Approach

This paper examines the long-run effect of major macroeconomic shocks, using the structural vector autoregression (SVAR) approach, on stock prices for the Korean stock market, one of the leading emerging markets. Novel features of the modeling is to expand the dimension of the bivariate SVAR model of Blanchard and Quah (1989) and of Hess and Lee (1999) by including stock market shocks in addition to the pre-identified supply and demand shocks. Moreover, our three-variable SVAR model is further generalized to a five-variable SVAR, augmenting interest rate shocks and foreign exchange rate shocks. The model is estimated using monthly Korean market data from January 2003 to September 2015, and further estimated with two sub-samples using the recent global financial crisis period and non-crisis period. The estimation results using a three-variable model show that stock returns have a negative relation with demand shocks and a permanent positive relation with supply shocks. Risk premium shocks show a negative relation with inflation and a positive relation with real output growth. Interestingly, the subsample results indicate that the market fluctuations during the global financial crisis period have relatively little effect on the Korean stock market and its macro variables. With the five-variable model estimation, a ‘price puzzle’ is documented with evidence of a positive correlation between inflation and the interest rate shock. A positive correlation is also observed between inflation and the supply shocks in the long run. Lastly the forecast error variance decomposition indicates that the monetary policy change is the leading determinant of the long-run level of stock prices in the Korean stock market. These findings suggest that the recent expansionary monetary policy should be cautiously implemented in accordance with inflation movement.

The study is empirically motivated to analyze the link between trade openness, inflation, exchange rate and economic growth among the OPEC countries by using key macroeconomic variables across member countries. The study utilizes quarterly time series data for variables including economic growth, trade openness, exchange rate, consumer price index and oil price as exogenous variable in the system for over 164 quarterly data points. Utilizing the recently introduced model of Ambrigo and Inessa (2015), the study uses panel vector autoregression model and analyze how various shocks affect macroeconomic stability of the member countries. Trading shock as well as oil price shock are analyzed and responses of other macroeconomic indicators are evaluated. Based on the estimated result for impulse response and forecasted error variance decomposition result, the study established statistically significant link between trading shock and economic growth of the member countries while oil price shock is found to have significant but weak relationship with economic growth. Babed on the finding established, the study recommends that trading shocks is the main driver of cyclical fluctuation of the OPEC's member countries economic growth. Policies are therefore prescribed to smoothen the impact of trading shocks on the economic growth of the member countries.

Publisher Summary This chapter discusses the financial development and economic growth in underdeveloped countries. An observed characteristic of the process of economic development over time, in a market-oriented economy using the price mechanism to allocate resources, is an increase in the number and variety of financial institutions and a substantial rise in the proportion not only of money but also of the total of all financial assets relative to GNP and to tangible wealth. Typical statements indicate that the financial system somehow accommodates—or, to the extent that it malfunctions, it restricts—growth of real per capita output. Such an approach places emphasis on the demand side for financial services; as the economy grows it generates additional and new demands for these services, which bring about a supply response in the growth of the financial system. In this view, the lack of financial institutions in underdeveloped countries is simply an indication of the lack of demand for their services.

Oil price shocks and Chinese economy revisited: New evidence from SVAR model with sign restrictions

This study reassesses the resource–economic growth nexus by incorporating several channels. Advanced panel time series techniques are used to analyse panel time series data from 1980 to 2015 in 31 oil-rich countries. Results show that oil rent augments economic growth; thus, oil rent is conducive rather than impediment for economic growth. The role of governance in economic growth is significant in the selected countries. Oil rent exerts a positive significant impact on economic growth in countries with good governance compare to countries with poor governance. Financial development is an unimportant channel in the resource–growth nexus because FD is often unable to mobilise oil rent from the government to the private sector in oil-rich countries. Globalisation is advantageous for countries and promote economic growth. Moreover, war exerts a significant negative effect on growth in the long term.

The performance of the financial sector is of paramount importance in the development of an economy. The financial sector serves as the primary conduit between those who save and those who invest. By virtue of the information available regarding both groups of economic agents, this conduit facilitates the reduction of information asymmetries and enables more expedient investment targeting in specific sectors deemed crucial for economic growth. For decades, research has been conducted on the relationship between the financial sector and economic growth in individual countries or groups of countries with the aim of providing governments with recommendations on specific measures that will improve the welfare of economic agents and achieve higher economic growth. It also examines whether there is a link between economic growth and financial sector development, or vice versa, from economic growth to financial sector development. In light of the pivotal role of financial intermediaries in the economic advancement of nations, this study seeks to examine and evaluate the extent to which the financial sector in EU countries fosters economic growth, or vice versa. Furthermore, the study examines and assesses the extent to which the financial sector contributes to economic growth, in addition to the direction of the relationship between the two. The data set encompasses the period between 2010 and 2022. In order to achieve the objectives of the study, a panel model is applied to the EU countries. Two indicators are employed to capture financial sector activity: namely, banking efficiency and market capitalisation. The non-parametric DEA method is employed for the purpose of more fully capturing and characterising the EU banking sector, with the objective of measuring banking efficiency. This study eschews the use of traditional indicators in favour of a more complex indicator, namely technical efficiency, which is measured by DEA. This approach allows for the conversion of inputs and outputs into a single measure of bank efficiency. In order to account for the growing role of capital markets in the decades following the global financial crisis of 2008, the estimated models include market capitalisation as an additional factor. The results of the balanced panel model estimation confirm that the EU countries are characterised by the "supply-side hypothesis", i.e., financial intermediaries are important for economic development, and the estimated relationships are positive. However, the models highlight the pivotal role of the banking sector in driving economic growth in the older EU countries, as market capitalisation has been demonstrated to have a limited impact on economic growth in these countries. This suggests that those responsible for economic policy should prioritise the improvement of the banking sector and encourage banks to play a more active role in intermediation, with the aim of achieving economic growth.

The debate on the nexus between monetary policy and economic growth has become an on-going and interesting one both in the academia and among policy makers. More importantly is the relationship based on regional or monetary union, which has not received much attention especially in sub-Saharan Africa as against the much developed economies. In this paper, the Structural-Vector Auto Regressive (S-VAR) model was employed to investigate the interactions between some selected economic variables and growth in the Economic Community of West Africa (ECOWAS) monetary union from 1980:Q1-2015:Q4. These variables are oil price and commodity price volatilities, net domestic credit, inflation rate, exchange rate, money supply, monetary policy and gross domestic product growth rate. To start with, the study tested for the presence of unit roots in order to ensure the stationarity of variables. This was followed by the confirmation of long run relationship among the variables, using the Panel ARDL model. The result of the eight S-VAR variables reveals that oil and commodity price volatilities constitute important exogenous disturbances to monetary policy. The medium through which this works is the exchange rate; and from exchange rate to money supply. Finally, this effect is passed on from money supply to the growth rate of the gross domestic product. In addition, the Impulse Response Analysis and Variance Decomposition outcomes show exchange rate to be playing dominant role in determining the behavior of monetary policy within the ECOWAS region. In this regard, the supply of money is the major transmitter of all the interactions to the growth rate of the gross domestic product as it dictates the behavior of the GDP growth rate more than other variables in the S-VAR model. One policy implication from the results of this study is that the recent monetary policy tightening in most of the ECOWAS countries to mitigate the rise in inflation rate may adversely affect economic growth of the region. This is because investment may be discouraged as a result of high lending rate. Not only that, any monetary shock especially in terms of the exchange rate could have adverse symmetric effect on the economies of the region.

In this paper we investigate the effect of oil price shocks on stock market index in Iran, by using of a structural VAR (SVAR) approach. We used four variables in the model namely Kilian index, global oil supply, real oil price and real stock market index. The data are monthly and spanning the period 1997M10-2014M12. We identify the effect of four different shocks on stock market including oil supply shock, aggregate demand shock, other oil-specific shock and other stock-specific shock. Empirical evidences from impulse response functions (IRFs) indicate that oil supply shock is not significant, and the impact of other three shocks persists for about 3, 6 and 2 months respectively. Variance decomposition (VD) of stock market index indicates “other stock-specific shock” is the most important explainer of its variations. These findings are consistent with the findings of other oil-exporting countries including Saudi Arabia, Kuwait, Mexico, Norway, Russia, Venezuela and Canada except the effect of oil supply shock in variance decomposition of stock market index.

The study empirically examines the effect of oil price shocks and food importation on economic growth in Nigeria along with two control variables i.e. exchange rate and inflation using Structural Vector Autoregressive (SVAR) Model covering the period of 1970 to 2015. The result from SVAR short-run pattern and long-run pattern indicate that GDP has recently been affected by all variables in the model. More also, it indicates a significant permanent effect of crude oil price shocks and food imports on economic growth, while the result further indicates a transitory effect of exchange rate and inflation on economic growth. For significant t-value of the long run SVAR estimate matrix, confirms long effect of crude oil price shocks, food imports, exchange rate and inflation on economic growth in Nigeria. The results from structural response indicate that crude oil have high positive impact on GDP at the initial period and negative impact at the end of the period. Furthermore, food imports have high negative effect on GDP, while GDP response negatively to exchange rate and inflation rate from the period. The result from the structural decompositions indicates that crude oil price and food imports and exchange rate contribute more variability to GDP, while inflation contribute less variability in explaining the variation of GDP in Nigeria. The study recommends that government should come up with a policy that will focus on alternative sources of government revenue by investing more in real sectors especially agriculture in order to withstand vicissitudes of oil shocks in future.

Expansionary public expenditure is a popular important fiscal measure in the constraint of budgetary resources to achieve higher economic growth with the expectation of higher multiplier effect on productive sectors in the world. Since the actual multiplier effect contradicts with the expected multiplier effect in this discretionary fiscal practice, the goal of higher economic growth is not well achieved. In this context, the practice of public expenditure is a key concern of scholars to understand whether it is the best one or whether its multiplier effect is higher. In this context, this study is an important attempt. This paper assesses the multiplier effects of public expenditures on economic growth in Nepal, covering time series data sets of public expenditures and economic growth from 1974-75 to 2018-19 by using the structural vector auto-regressive (SVAR) model. As a result of the SVAR model, the multiplier effect of public expenditure, recurrent expenditure, and capital expenditure is positive for economic growth. In the results, the multiplier effect of recurrent expenditure is found to be more promising than capital expenditure for economic growth in the short run, but in the long run, it is lower. Similarly, the multiplier coefficient value of capital expenditure is lower in the short run. This is probably due to leakages in the economy, corruption and improper management of development funds, seasonal expenditure trends, and poor management of development projects. Thus, public expenditure is an important fiscal measure to developing economy like Nepal to create a multiplier effect through aggregate demand on national income and employment. Therefore, the government should improve the efficiency of public expenditure and the ratio of capital expenditure and private investment to improve the higher multiplier variable in the long run. The result of this paper will be a valuable input to the policymaker and the planner of Nepal to improve the efficiency of public expenditure through the implementation of a mid-term expenditure framework.

This study provides empirical evidence on the problem of the trilemma of monetary policy in an open economy, in the context of the effect of exchange rates and foreign capital flows on the performance of the ITF in Indonesia. The method used as an empirical estimate is the Structural Vector Autoregressive (SVAR) model. This model allows to include restrictions in the empirical estimation of parameters that measure the contemporaneous effect of one variable on another variable according to the structure of the macroeconomic model. Meanwhile, the lagged effects are estimated according to the VAR model. Therefore, the SVAR model is considered more appropriate than the ordinary VAR model because it can measure both the instantaneous effect and the intertemporal effect of the problem under study. The SVAR model uses restrictions that are consistent with the theoretical model in its estimation, regardless of the time-to-time effect of one variable on another. There are 9 variables in the SVAR model, namely: global risk, oil prices, federal funds rate, economic growth, inflation, interest rates, monetary policy, credit interest rates, foreign portfolio investment flows, and the rupiah exchange rate. All data used were obtained from several sources, including: Bank Indonesia, Central Statistics Agency, and IMF. Based on the estimation results, the exchange rate and foreign capital flows have a significant effect on inflation and economic growth, thus affecting the performance of the ITF in Indonesia. In particular, there is a relative influence between external factors, particularly global commodity prices, US monetary policy interest rates, and global risks, and domestic factors, particularly economic growth, monetary policy interest rates, and bank interest or credit rates. This study also concludes that in addition to inflation and economic growth considerations, Bank Indonesia also considers exchange rate movements in determining its interest rate policy response.

E conomic growth is one of the goals of development in the economic plans of every country. Achieving self-development in OPEC member takes precise awareness of the amount and cause of the impact of economic variables on each other and it is, determining the policies and efficient, appropriate strategies for each case. Among these variables, oil revenues, total government expenditure, government expenditure for education, government expenditure for health, and economic growth could be mentioned. An examination of the trend of changes in health expenditure in Iran shows up until 2011. After that, there has been a leap in these expenditures. The share of government education expenditure in the total government budget in Iran has been showing a steady decline in these expenditures. panel data, we study the relationship between health expenditure and education expenditure and economic growth in OPEC countries and Iran from 2004 to 2016. Hence, the panel data method has been applied to estimate models and the panel VAR method has been applied to examine the causality relationships between variables. The results show a positive meaningful relationship between oil revenues, total government expenditure, government expenditure for education, government expenditure in health, and economic growth of OPEC countries and Iran. Furthermore, the result of the Granger Causality test suggests that there is a practical, mutual relationship between oil revenues and economic growth, total government expenditure and economic growth, and also a practical one-sided relationship of economic growth with government expenditure for education and also one-sided relationship of economic growth with government expenditure for health in OPEC countries and Iran.

This paper studies the dynamic effect of oil rents on the industrial added value in a sample of countries with different development levels. Using a structural vector autoregressive (SVAR) model, we tested the effect of a real shock and a nominal shock on the variables of the model. The main obtained results are three. First, we confirmed that the Dutch disease (DD) problem is a short–term phenomenon that takes place each time when there is a shock on oil rents. Second, the ephemeral nature of the phenomenon confirms the neoclassical assumption stating that the effect of nominal shocks on real variables is only short term. Third, the effect of long–term real shock on oil rents is positive for all countries which score interdependence between industry on the one hand and oil rents on the other.

Present study investigates the effect of oil resource rent on financial development through the stock market. In this case, the analysis process has been accomplished in two different states: considering and ignoring the institutional quality index in oil resource rent at the values above and below the financial development threshold. The threshold structural vector autoregression (TSVAR) model has been employed to analyze the stock markets in Norway and Brazil from 1984 to 2019. In Brazil, by ignoring the institutional quality index, the resource curse hypothesis is confirmed at the values below the financial development threshold. If the institutional quality index increases, the positive oil rent shock leads to the increment of the financial development through the stock market. Therefore, the hypothesis of the resource curse is rejected in this country. In Norway, by ignoring the institutional quality, the resource curse hypothesis is confirmed at the values above the financial development threshold. If the institutional quality is considered in oil rent, a positive shock to oil rent reduces the financial development through the stock market in a short-term period. This situation increases the financial development through the stock market in a long-term period. As a result, an increase in the institutional quality contradicts the resource curse hypothesis at the values above the threshold level. In Norway, if the institutional quality in oil rent is considered, a positive shock to oil rent enhances financial development through the stock market at the values below the threshold.

Oil rents significantly contribute to income in OPEC member economies and could have environmental consequences. The present study explores the asymmetrical effects of oil rents on CO2 emissions in 13 current OPEC economies using a period 1970–2019, and also tests the Environmental Kuznets Curve (EKC) hypothesis. Long-run results show that economic growth has a positive effect, and its square term has a negative effect on CO2 emissions in Algeria, Congo, Gabon, Kuwait, and Saudi Arabia, which validate the EKC in these countries. However, a U-shaped effect of income growth on emissions is substantiated in Angola. Moreover, rising oil rents have positive effects on CO2 emissions in Saudi Arabia, Angola, Congo, Equatorial Guinea, Iran, Iraq, Kuwait, and Libya, and have negative impacts in Algeria, Nigeria, and the UAE. Decreasing oil rents reduce CO2 emissions in Angola, Equatorial Guinea, Libya, and Saudi Arabia, and increase emissions in Algeria. Moreover, asymmetrical effects of oil rents on emissions are found in Angola, Congo, Iran, Iraq, Kuwait, Nigeria, Equatorial Guinea, Saudi Arabia, and the UAE. The short-run results show that the EKC is validated in Algeria, Congo, and Libya. However, economic growth shows a monotonic positive impact on emissions in Nigeria, the UAE, and Venezuela. Increasing oil rents show a positive impact on emissions in Angola, Congo, Iran, and Kuwait and carry a negative impact in Algeria and the UAE. In addition, decreasing oil rents increase CO2 emissions in Algeria, Gabon, Nigeria, and Saudi Arabia. We recommend Angola, Congo, Equatorial Guinea, Iran, Iraq, Kuwait, Libya, and Saudi Arabia to adopt tight environmental policies in times of increasing oil rents to avoid the negative environmental consequences of oil rents.