Trade Shock, Inflation, Exchange Rate and Economic Growth: Empirical Evidence from OPEC Countries Using Panel Vector Autoregression

Abstract

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.