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Decomposing the links between oil price shocks and macroeconomic indicators: Evidence from SAARC region

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  • Ahmed, Khalid
  • Bhutto, Niaz Ahmed
  • Kalhoro, Muhammad Ramzan

Abstract

This study examines the impact of oil price shocks on key macroeconomic variables (i.e., real GDP, interest rate, inflation and exchange rate) for five SAARC countries (i.e., India, Pakistan, Bangladesh, Sri Lanka and Bhutan). For this purpose, we adopt contemporary macroeconomic policy modeling tool called impulse response function (IRF) and forecast error variance decomposition method (FEVDM) in the structural vector autorepression (SVAR) setting using time series data over the extended period from 1982 to 2014. In addition, Johansen and Juselius (1990) cointegration method is applied for long-run relationship. The results of cointegration test confirms the long-run equilibrium relationship between all the underlying variables. However, the empirical findings of IRF explained significant variation among all underlying macroeconomic variables in response to exogenous oil price shocks at different time horizons. It means the macroeconomic factors are sensitive to even small oil price shocks and possess various socio-economic implications in the region. The results of FEVDM evidence that each country in a study group responds differently to oil price shocks, it corresponds their independent policies, macroeconomic fundamentals, sector constructions and heterogeneity across the countries. The findings help governments to reform public policies in the region by controlling macroeconomic fluctuations due to oil price shocks.

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  • Ahmed, Khalid & Bhutto, Niaz Ahmed & Kalhoro, Muhammad Ramzan, 2017. "Decomposing the links between oil price shocks and macroeconomic indicators: Evidence from SAARC region," MPRA Paper 84901, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:84901
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    More about this item

    Keywords

    Oil price shocks; Interest rate; GDP; SAARC; SVAR model;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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