Oil Revenue Shocks Research Articles

The Impact of Oil Revenue Shocks on the Volatility of Iran’s Stock Market Return

The Impact of Oil Revenue Shocks on the Volatility of Iran’s Stock Market Return

Oil Shocks, External Adjustment, and Country Portfolio

AbstractThis study examines the intertemporal nature of countries’ external adjustment by using two oil income shocks with different timings: giant oil discovery news shocks and contemporaneous oil revenue shocks from international oil price changes. Empirical estimates using a large panel of countries support the intertemporal theory. Net foreign assets hike immediately upon oil revenue shocks, but decline for the first 5 years after oil discoveries and rebound subsequently. These adjustments are largely through the current account but partially stabilized by valuation effects for oil revenue shocks. Oil discoveries attract FDI inflows, while oil revenue shocks increase foreign debt assets holdings.

Investigating the Shocks of Real Sectors of the Economy on the Welfare Index in the Iranian Economy

The vector auto regression model was used to investigate the effect of real sector shocks on the social welfare in Iran during the period of 1980-2019.The results of the impulse response test showed that the Amartya Sen welfare index showed a rapid response to the shocks of total factor productivity growth in the first period, which had a zero effect over time. The utility-oriented welfare index reacts positively to the shocks of total factor productivity growth in the first period, which has decreased from the second period and has become negative even from the fifth period. Amartya Sen Welfare Index and utility-oriented welfare index shows a positive and rapid response to real GDP per capita shocks in the first period, which is adjusted over time, and from the seventh period. The Amartyasen Welfare Index reacts negatively to oil revenue shocks and is very weak. If the utility-oriented welfare index shows a positive response in the first period, but in the following periods, its effect is adjusted and remains partially positive. Amartya Sen welfare index shows a leap and positive response to employment shocks from the first period and its trend continues and from the fifth period it continues in a positive and stable manner and the utility welfare index has a similar trend to Amartya Sen welfare index. Discussion: In the Iranian economy, employment leads to increased social welfare, while in the long run, oil revenues, GDP per capita and growth in total factor productivity have led to a decrease in social welfare. Therefore, in the Iranian economy, creating employment and reducing unemployment is the most appropriate factor to increase welfare.

Modeling for policy: Managing volatile oil windfalls in a resource-rich developing country

Designing policies for allocating revenues from natural resources is one of the most challenging issues faced by policy makers in resource-rich economies. This paper proposes different scenarios for optimizing crude oil revenues through the application and extension of a dynamic general equilibrium model in Iran. Under the base scenario, the government budget includes a predetermined percentage of revenues while in the policy scenario, three mechanisms involving savings, investments and revenue stabilization features are modeled separately. The simulation results for the base scenario show that the percentage changes in government revenue and economic growth are influenced by oil revenue fluctuations. However, in the policy scenario the mechanism proposed strengthens both government budgets and economic growth. The results of this scenario show a gradual decline over time in the reliance of government budgets on oil revenues while revenue from taxes broadens the budget base. Policy-wise, it can be argued that if governments adhere to the designed mechanisms, changes in oil revenues would not affect a country's macroeconomic variables. Also, having a sustainable revenue stream for the government and securing the real economic sectors against oil revenue shocks would enhance the benefits from natural resource endowments.

Investigating the Effect of Oil Revenue Shocks on Business Cycles and the Synchronism of Cycles with Selected OECD Countries

The effect of temporary and permanent shocks of oil revenues on the concurrence of trade cycles between Iran and selected OECD countries has been investigated using the data series of the period 1985–2019. For this purpose, first, business cycles and temporary and permanent shocks of oil revenues are extracted using Hodrick-Prescott (HP) filter and Blanchard-Quah technique, respectively. Then, the relationship between business cycles and model-independent variables is evaluated by the ARDL method. The results show that the main cause of business cycle fluctuations is temporary shocks to oil revenues, also, government expenditure variables and permanent and temporary shocks to oil revenues in the short and long term have a negative and significant effect on business cycles, and the exchange rate variable has a positive and significant effect on business cycles. Estimation of business cycle synchronization index shows that Belgium, Germany, Greece, Japan, Spain, and Turkey have had business cycles synchronization with Iran. And Germany with a correlation coefficient of 0.42 has the most synchronization of business cycles with Iran.

Good policy or good luck? Analyzing the effects of fiscal policy and oil revenue shocks in Ecuador

This paper proposes a framework to estimate the effects of exogenous fiscal policy and oil revenue shocks on the macroeconomic activity of price-taking oil producers. We use a structural vector autoregressive model estimated with Bayesian methods and apply it to the Ecuadorian economy. Specifically, we investigate the effects of unanticipated changes in taxes, government consumption spending, government investment spending, and oil revenues on economic activity. The results show that unanticipated expansive fiscal policy either through taxes or government investment can have positive effects on output. However, contrary to most studies in the literature, consumption spending shocks do not significantly affect gross domestic product. We also find that oil revenue shocks influence all the variables in the model, evidencing the vulnerability of the Ecuadorian economy to fluctuations of oil revenues. Historically, oil revenue shocks have been the most important driving force to move output above or below trend.

Oil Shocks, External Adjustment, and Country Portfolio

This study examines the intertemporal nature of countries’ external adjustment by using two types of oil income shocks with different timings, namely, giant oil discovery news shocks and contemporaneous oil windfalls arising from the possible exogenous changes in the international oil spot price. Empirical estimates based on a large panel of countries from 1970 to 2011 are consistent with the intertemporal model. Net foreign assets hike immediately upon oil revenue shocks, but decrease in the first five years after oil discoveries, and then increase sharply after oil production starts. Meanwhile, the external adjustments upon oil shocks are largely through the current account channel, and valuation effects only partially stabilize the current account adjustment for oil revenue shocks. Moreover, oil discoveries attract a large amount of foreign direct investment inflow to share the risk of oil extraction, and oil revenue shocks significantly increase the net holdings in low-risk foreign debt assets. Our results indicate that risk-sharing may play an important role in country portfolio diversification.

Asymmetric effects of oil revenue shocks on government spending composition and productive sectors: new evidence from Nigeria

AbstractOil revenue plays an important role in meeting government obligations in Nigeria. It accounts for almost 90 per cent of the total export earnings and government spending. Given the high relevance of oil in Nigeria, this paper examines the asymmetric effects of oil revenue shocks on government spending and the real sectors from 1970 to 2017. We find no long‐run equilibrium relationships among oil revenue and the variables of interest. However, when we allow for non‐linear relationship, cointegration is found to exist only for negative oil revenue and the variable of interest. Both the asymmetric variance decomposition and the generalised asymmetric impulse response function show positive responses of agricultural output and capital expenditure to negative oil revenue shocks while only manufacturing output and recurrent expenditure respond negatively. We recommend that the government should not depend solely on oil exports as the major source of revenue but also create incentive in the non‐oil sectors for complementary revenue generation.

Oil Revenue Shocks and the Growth of the Non-Oil Sector in an Oil-Dependent Economy: The Case of Oman

There is no consensus among economists on whether natural resource abundance is a curse or a blessing for countries heavily endowed with such resources. Oman is a small oil-exporting country that heavily relies on oil revenues. Recent adverse shocks to oil prices have left Oman’s economy more vulnerable relative to other countries relying on oil for their main source of income. One reason for this outcome may be that Oman’s private non-oil sector heavily depends on government spending and projects, which typically decelerate after negative oil shocks. Using a cointegrating Vector Autoregressive Regression (VAR) model and quarterly data covering the period 2000 to 2015, we evaluate the “oil-curse” phenomenon for Oman by exploring long-run and short-run relationships among economic growth sourced from non-oil producing sectors, oil revenues, and government expenditures. We also use causality tests and impulse responses to measure the extent of short-run and long-run macroeconomic implications of negative oil shocks for Oman. Results suggest that a sound fiscal policy that allows for true sectoral diversification of income is crucial to avoid an oil curse in Oman.

The effect of external shocks on Iran's oil economy: a BVAR‐DSGE approach

AbstractGiven the economy's high dependence on oil revenues as well as oil's influential role in the government's budget, we seek to examine the impact of oil revenue shocks on Iran's economy by means of a DSGE‐BVAR model. To capture the intrinsic features of Iran's economy, we allow for a higher level of rigidity for government current spending as oil revenues play an integral role in public budget allocation to current and construction spending. As oil accounts for a high percentage of Iran's currency revenue, we take it as the sole source of export income. We identify technology shocks, oil revenue shocks, exchange rate shocks and money supply shocks as the main sources of business cycle fluctuations. After estimating the model with quarterly data over the period 1369:1–1392:4, the analysis of impulse response functions indicate that production and inflation responses to shocks confirm factual data and the relevant theories. In response to monetary and oil shocks, output rises in the short term while it falls as a result of a surge in the general price level. Exchange rate shock generates a decrease in output but it increases in the long run gaining support from better investment. Moreover, positive monetary, currency and oil shocks generate an increase in inflation while technology shocks induce a decrease in inflation.

The effects of oil shocks on government expenditures and government revenues nexus in Nigeria (with exogeneity restrictions)

The study employed data from 1981 to 2014 to investigate the effects of oil shocks (price and revenue) on the dynamic relationship between government revenues and government expenditures in Nigeria and how it transmits effects on major macroeconomic variables using structural VAR (SVAR) on key variables, and also employed unrestricted VAR and Vector Error Correction (VEC) Models on expanded number of variables. The results of SVAR show that oil price shocks could not predict the variation in government expenditure in the short-run, while the predictive power of oil revenue shocks is very strong both in the short-run and in the long-run. The VAR and VECM also substantiate the results of SVAR and provide further insight which shows that short-run fiscal synchronization hypothesis is evidenced between the oil revenues and total government expenditures, while spend-tax hypothesis exists in the long-run between total expenditures and total revenues. It is also evidenced that oil shocks highly affect policy variables in the short-run and transfer the effects on the other macroeconomic variables in the long run. Thus, the study suggests expedient government actions to redirect the economy from oil revenue dependency towards diversifications along other less volatile sources of revenues so as to prevent long-run transmission of effects of oil shocks on broader macroeconomic variables.

The effects of oil shocks on government expenditures and government revenues nexus (with an application to Iran's sanctions)

The main purpose of this study is to investigate the dynamic relationship between government revenues and government expenditures in Iran as a developing oil export based economy. Moreover, I want to know how oil price (revenue) shocks can affect this relationship. The results of the impulse response functions and variance decomposition analysis indicate that the contribution of oil revenue shocks in explaining the government expenditures is stronger than the contribution of oil price shocks. Moreover the results of the vector autoregression (VAR) and vector error correction (VEC) models show that the strong causality is running from government revenues to government expenditures (both current and capital) in Iranian economy while the evidence for the reverse causality is very weak. Overall the results support the revenue–spending hypothesis for Iran. My results imply that those sanctions aiming to restrict the Iranian government's oil export revenues, potentially can affect the government total expenditures as an important engine for developing the Iranian economy.

Oil revenue, institutions and macroeconomic indicators in Nigeria

AbstractThe influx of massive revenues during periods of abnormally high oil prices creates enormous challenges for policy‐makers in oil‐producing countries. In Nigeria, the prudent utilisation of oil revenues has remained elusive for policy‐makers over time. While the country has earned sizeable oil revenues from its natural endowment, poverty and income inequality have been persistent. This study tests the sensitivity of several important macroeconomic indicators to oil revenue shocks. We additionally test for the effect of ‘institutional quality’, in recognition of the important role played by the domestic institutional context in shaping the policy responses adopted by successive Nigerian governments to oil windfalls over time. The sensitivity analysis supports the general view that fluctuations in oil revenues have resulted in inflation, lower output growth and real exchange rate appreciation in Nigeria. More importantly, the aforementioned institutional variable is found to be very significant. This finding is consistent with the general assessment of fiscal performance in Nigeria during oil windfalls as being driven by domestic institutional dynamics. Ostentatious public consumption widened fiscal deficits, and government spending has been highly pro‐cyclical during windfall episodes. In conclusion, the study offers appropriate policy recommendations, which could be adopted to enhance the management of future oil windfalls in Nigeria.

Oil income shocks and economic growth in Iran

The aim of this paper is to study the relationship between oil revenue shocks and output growth in Iran by Adopting an SVAR model over the period 1959–2008. The results indicate that positive and negative oil revenue shocks significantly affect output growth positively and negatively respectively and these effects are asymmetric. While negative oil revenue shocks adversely affect the economic growth, the resource curse impedes the expected positive effects of positive oil shocks. In order to overcome the harmful effects of oil booms and busts, the establishment of oil stabilization and saving funds, diversifying economy, delinking government expenditure from oil revenues and introducing fiscal rules into the budget seems crucial for Iran economy.

Oil revenue shocks and government spending behavior in Iran

Oil revenues play an important role in the political economy of Iran. On average, 60% of the Iranian government revenues and 90% of export revenues originate from oil and gas resources. Current international sanctions on Iran have mainly targeted the oil production capacity of Iran and its exports to the global markets. In this study, we analyze the dynamic effects of oil shocks on different categories of the Iranian government expenditures from 1959 to 2007, using impulse response functions (IRF) and variance decomposition analysis (VDC) techniques. The main results show that Iran's military and security expenditures significantly respond to a shock in oil revenues (or oil prices), while social spending components do not show significant reactions to such shocks.

Aggressive oil extraction and precautionary saving: Coping with volatility

The effects of stochastic oil demand on optimal oil extraction paths and tax, spending and government debt policies are analyzed when the oil demand schedule is linear and preferences quadratic. Without prudence, optimal oil extraction is governed by the Hotelling rule and optimal budgetary policies by the tax and consumption smoothing principle. Volatile oil demand brings forward oil extraction and induces a bigger government surplus. With prudence, the government depletes oil reserves even more aggressively and engages in additional precautionary saving financed by postponing spending and bringing taxes forward, especially if it has substantial monopoly power on the oil market, gives high priority to the public spending target, is very prudent, and future oil demand has high variance. Uncertain economic prospects induce even higher precautionary saving and, if non-oil revenue shocks and oil revenue shocks are positively correlated, even more aggressive oil extraction. In contrast, prudent governments deliberately underestimate oil reserves which induce less aggressive oil depletion and less government saving, but less so if uncertainty about reserves and oil demand are positively correlated.

Aggressive Oil Extraction and Precautionary Saving: Coping with Volatility

The effects of stochastic oil demand on optimal oil extraction paths and tax, spending and government debt policies are analyzed when the oil demand schedule is linear and preferences quadratic. Without prudence, optimal oil extraction is governed by the Hotelling rule and optimal budgetary policies by the tax and consumption smoothing principle. Volatile oil demand brings forward oil extraction and induces a bigger government surplus. With prudence, the government depletes oil reserves even more aggressively and engages in additional precautionary saving financed by postponing spending and bringing taxes forward, especially if it has substantial monopoly power on the oil market, gives high priority to the public spending target, is very prudent, and future oil demand has high variance. Uncertain economic prospects induce even higher precautionary saving and, if non‐oil revenue shocks and oil revenue shocks are positively correlated, even more aggressive oil extraction. In contrast, prudent governments deliberately underestimate oil reserves which induce less aggressive oil depletion and less government saving, but less so if uncertainty about reserves and oil demand are positively correlated.

The asymmetric relationship between oil revenues and economic activities: The case of oil-exporting countries

This paper examines the nonlinear or asymmetric relationship between oil revenues and output growth in oil-exporting countries, applying a dynamic panel framework and two different measures of oil shocks. The main results in this paper confirm the stylized facts that in heavily oil-dependent countries lacking the institutional mechanisms de-linking fiscal expenditure from current revenue, oil revenue shocks tend to affect the output in asymmetric and nonlinear ways. The findings suggest that output growth is adversely affected by the negative oil shocks, while oil booms or the positive oil shocks play a limited role in stimulating economic growth. The findings have practical policy implications for decision makers in the area of macroeconomic planning. The use of stabilization and savings funds and diversification of the real sector seems crucial to minimize the harmful effects of oil booms and busts.