The impacts of oil price shocks on small oil-importing economies: Time series evidence for Liberia

Abstract

This study reviews the relevant literature on oil price impacts and then applies both asymptotic and bootstrap distribution techniques to model various oil price shocks and to subsequently evaluate their impacts on key macroeconomic variables in Liberia.First, we find that different oil shock measures yield different effects. Second, asymmetries in oil price exist and can be explained by Liberia's lack of structured financial markets and tight monetary policy controls. Third, the impact of oil shocks on all variables is limited to the short-run. Fourth, unlike most developed economies, falling oil price regimes yield no benefits to economic growth in the short-run, but rising oil prices appear to stimulate the Liberian economy.Therefore, we argue that when oil price increases in Liberia, the high costs of reallocating resources from oil-intensive sectors lead to labor intensiveness; whose contribution to Liberian GDP by far exceeds that of oil. Hence, a general insight from the study is that where substitution possibilities exist, rising oil prices lead to high labor and capital intensity and could have off-setting effects depending on the contribution of these factors to GDP. Thus, falling oil price regimes in Liberia should witness policy measures aimed at boosting the service sector.