The Vulnerability to Oil Price Shocks of the Bangladesh Economy

Abstract

The economic impacts of oil price shocks have been widely examined since the first oil crisis of 1973. However, most of the earlier studies have primarily focused on advanced economies while emerging countries have received less attention. In Bangladesh, the link between oil and the economy is strong, as oil consumption has increased dramatically in the last 10 years and made the country increasingly exposed to oil price shocks. This chapter collects evidence from the economic literature on the impact of oil price shocks in Bangladesh to assess how vulnerable the country is to changes in oil prices. The chapter first presents the main methodologies used in the literature: Dynamic Stochastic General Equilibrium (DSGE) and Macroeconometric models, underlining their respective advantages and disadvantages. It subsequently reviews the existing literature for Bangladesh and focuses on economic policies. The chapter concludes by stating that while econometric studies show a consensus on the detrimental effects of oil price shocks on the Bangladesh economy, DSGE models reveal mixed results. As Bangladesh is working toward fulfilling its Paris Agreement Climate pledge, it is expected that the country will increase the proportion of renewables in its power generation fuel mix and mitigate any detrimental effects from future oil price shocks.KeywordsOil Price Shocks (OPS), Dynamic Stochastic General Equilibrium (DSGE), Vector Autoregression (VAR), Impulse Response Functions (IRFs), Bangladesh, Macroeconomy