Asymmetric Effects of Oil Price Shocks on Economic Growth and Inflation in Asia: What do We Learn from Empirical Studies?

Asymmetric impacts of oil price shocks on key macroeconomic variables are caused by some important effects, such as income effect, uncertainty effect, precautionary saving effect, irreversible investment and reallocation effects. Due to these effects, output and prices respond diferently to oil price increases and decreases. This asymmetry hypothesis has been empirically tested by many economists. This paper surveys recent empirical studies on the asymmetric impacts of oil price shocks on economic activity and inflation in Asia. The empirical findings in Asian economies shows that the responses of output growth oil price shocks in Japan and South Korea tend to be asymmetric while the responses of inflation seem to be symmetric. For China, the largest oil-importing in Asia, the empirical results show that asymmetry is increasingly discovered. The results of the responses of inflation to oil price shocks in China do not favor the asymmetry hypothesis. The findings in the ASEAN5 economies are likely to support the symmetry hypothesis. In South Asian economies, only few studies favor the asymmetry hypothesis. Because empirical results for other Asian countries are not widely investigated, it is too early to draw some conclusions. One important finding is that Asian oil-exporting countries, Indonesia, Malaysia, and Vietnam, might not escape the adverse impacts of oil price shocks on output growth. Since output and inflation can be unfavorably affected by oil price shocks, some researchers will recommend accommodative monetary policy along with exchange rate policy to stabilize the responses of output and prices when oil price tends to increase.