A Survey of the Asymmetric Effects of Oil Price Shocks and Real Exchange Rate Fluctuation on Economic Growth and Inflation in Selected Countries of the Islamic Conference: EGARCH Approach

اقتصاد و توسعه منطقه ای

Article 8, Volume 30, Issue 25, June 2022, Pages 250-290   

Document Type: Original Article

DOI: 10.22067/erd.2023.72209.1066

Authors

sarvoddin fathi¹; masod nonegad^{* 2}; hashem zare³; ali haghighat³

¹Ph. D in Economics, Department of Economic, Faculty of Economic and Management, Shiraz Branch, Islamic Azad University

²Assistant Professor, Department of Economic, Faculty of Economic and Management, Shiraz Branch, Islamic Azad University,

³Assistant Professor, Department of Economic, Faculty of Economic and Management, Shiraz Branch, Islamic Azad University

Abstract

1- INTRODUCTION
The selected member countries of the Islamic Conference, including Iran, with different cultural, social, economic and environmental structures, have high degrees of instability in economic variables. Economic growth and inflation in the economy of these countries, compared to the economy of advanced countries, are more exposed to fluctuations. Experimental studies conducted in many of these countries show that there is a strong relationship between the real exchange rate and oil shocks and the performance of indicators such as inflation and economic growth. It has been developed and is being developed to examine the effects of oil shocks on the macroeconomic structure.
In fact, with the occurrence of positive oil shocks in the 1970s and the subsequent occurrence of the global economic recession, the attention of many researchers was directed to the study of the effects of oil shocks on the macroeconomic structure. On the other hand, the fluctuations caused by the real exchange rate due to creating uncertainty among the economic agents affects their future decisions to make investments (domestic and foreign). Since the investment is part of the demand of the entire economy and any disruption in it leads to disruption in production, therefore any change and fluctuation in the real exchange rate will also affect the economic variables.
 
2- THEORETICAL FRAMEWORK
Effects of independent variables on economic growth in oil exporting countries
Oil price shock: A decrease in the price of oil will reduce the government's oil revenues in oil exporting countries. Since the current expenses are sticky towards the bottom and it is not possible to reduce it easily when the oil revenues decrease, the decrease in oil revenues causes a decrease in infrastructure investments, which in turn decreases the production of the society.
 
Fluctuation of the real exchange rate: Fluctuation of the real exchange rate is due to the increase in the costs of producers due to the increase in the price of raw materials, intermediate goods and imported capital, which can lead to the weakening of domestic production and the reduction of economic growth.
Effects of independent variables on inflation in oil exporting
Oil price shock: An increase in oil prices will probably decrease the total supply. Because with the increase in the price of energy, companies buy less energy, so that the productivity of labor and capital, followed by potential production, decreases and the level of prices increases.
Volatility of real exchange rate: Increase in exchange rate fluctuations and uncertainty in it causes an increase the risk of international trade and increases the cost of trade, which causes a decrease in trade and a decrease in production and economic growth, and finally causes an increase in the price level.
Effects of independent variables on economic growth in oil importing countries
Oil price shock: An increase in oil prices by transferring income from importing countries to oil exporting countries causes a decrease in total demand and a slowdown in economic activities, resulting in a decrease in economic growth.
Fluctuations in the real exchange rate: With a decrease in the value of the currency, the price of imported goods increases. Now, if these imported goods are intermediate goods, the increase in their price leads to an increase in the production costs of goods that use these goods, which leads to a decrease in total production and economic growth.
Effects of independent variables on inflation in oil importing countries
Oil price shock: An increase in oil price leads to a decrease in disposable income in oil importing countries, and with an increase in production cost, it also reduces investment demand and increases the price level.
Volatility of the real exchange rate: An increase in the real exchange rate causes a decrease in the value of the national currency and an increase in the price of intermediate and capital imported goods, and causes an increase in production costs and, as a result, an increase in inflation.
 
3- METHODOLOGY
The current research is to investigate the effects of positive and negative oil price shocks, real exchange rate on economic growth and inflation in crude oil exporting and importing countries from two selected groups including twelve exporting countries (including Iran, Iraq, Saudi Arabia, United Arab Emirates, Algeria, Kuwait, Libya, Nigeria, Qatar, Ecuador, Angola, Venezuela) and twelve oil importing countries including (Malaysia, Egypt, Mali, Gabon, Tunisia, Togo, Sudan, Guinea, Indonesia, Pakistan, Bangladesh, Turkey) will use. A model that can take into account the asymmetric impact of shocks is called GARCH-exponential or EGARCH model, which was presented by Nelson (Nelson, 1991). The reason for inventing this model is that the ARCH model considers the effect of good and bad news equally, and on the other hand, all conditional variance coefficients must be positive. To achieve this goal, by adapting the study economic growth and inflation models are introduced as follows:
 
 [1]
 [2]
 
LVpoil (logarithm of positive oil price shock), LVnoil (logarithm of negative oil price shock), LInf (logarithm of inflation), LRER (logarithm of real exchange rate), LVRER (logarithm of volatility of real exchange rate), LK (logarithm of investment) LE, (logarithm of human capital) and coefficients β, γ, ψ, λ, δ reflecting short-term and long-term relationships between economic growth variables and inflation with It is explanatory variables. The coefficient ε is the error component and the index i represents the country and the index t represents the time.
 
4- RESULTS & DISCUSSION
Our results show that the research hypothesis that the reaction of economic growth and inflation to oil price shocks is asymmetric in both groups of oil exporting and importing countries. Also, the results of the tests and estimation of models show that real exchange rate volatility has a negative and positive effect on the economic growth and inflation of oil exporting countries and a positive effect on the economic growth and inflation of oil importing countries.
 
5- CONCLUSIONS & SUGGESTIONS
Policy recommendations
Oil exporting countries
1- Governments can disconnect their expenses from oil shocks by implementing stabilization mechanisms such as foreign exchange reserves.
Oil importing countries
1- Oil-importing countries, considering a strategic oil reserve, can use that strategic reserve at the time of a sudden increase in the price of oil and avoid the bad impact of the oil price shock on growth indicators.
 
Keywords: Oil Price Shocks, Real Exchange Rate Volatility, Economic Growth, EGARCH.

Keywords

Oil Price Shocks; Real Exchange Rate Volatility; Economic Growth; EGARCH

References

References

Abbasian, E.; Muradpour Oladi, M., & Abbasiun, V. (2007). The effect of oil price uncertainty on industry, service and construction sectors. The Quarterly Journal of Economics, 2, 109-121. (in Persian)

Abbasian, E.; Muradpour Oladi, M., & Mehregan, N. (2012). The Effects of Real Exchange Rate Uncertainty on Economic Growth in Iran. Journal of Economic Research, 47(1), 153-169. DOI: 10.22059/JTE.2012.24677. (in Persian)

Abrishmi, H.; Mehrara, M.; Ghonimi Fard, H., & Farmers, M. (2008). The effect of oil price fluctuations on the economic growth of some OECD countries through the non-linear specification of oil prices. Knowledge and development, 22(15), 7-22. (in Persian)

Abrishmi, H.; Mehrara, M., & Zamanzade Nasrabadi, H. (2009). The relationship between oil shocks and the economic growth of OPEC member countries: is this relationship asymmetric? Quarterly Journal of Energy Economics, 21(6), 93-112. (in Persian)

Akbarian, R., & Mashidi, M. (2008). Investigating the effect of price and real exchange rate on Iran's economic growth using a self-explanatory model with distributed discontinuity. National Conference on Increasing Oil Revenues and Creating Job Opportunities, Islamic Azad University, Khomeini Shahr branch. (in Persian)

Allegret, Jean-Pierre.; Mignon Valerie., & Sallenave, Audrey. (2015). Oil Price Shocks and global imbalances: Lessons from a model with trade and financial intrdependencies,49,232-247.

Al-mulali, U., Che Normee, C. (2010). The Impact of oil shocks on Qatars GDP, MPRA Paper 27822, unidersity Library of Munich, Germany, Revised 31Dec 2010.

Anashasy, E-A. et al., (2005). Evidence on the Role of Oil Price in Venezuelas Economic performance: 1950-2001, Working paper, university of Washington.

Asna Ashari, A.; Nadri, K.; Abolhasani, A.; Mehregan, N., & Babaei, M. R. (2016). The impact of oil price shocks on inflation, growth and money, a case study of Iran. Economic growth and development research, 6(22), 85-102. (in Persian)

Berument, H.; Ceylan, N. B., & Dogan, B. (2004). The Impact of Oil price shocks on The Economic Growth of The Selected MENA Countries, Working paper, Bilkent University.

Box, G. E. P., & Jenkins, G. M. (1970). Time series analiysis: Forecasting andcontrol; San Francisco, CA Holden-Day Pub. Co.

Brown, S. P. A., & Yucel, M. K. (2002). Energy Prices and Aggregate Economic Activity: An Interpretative Study. Federal Reserve Bank of Dallas, Quarterly Review of Economic and Finance, Reserch Department Working Paper, No.0102.

Copook, J. D. (1962). International Economic Instability. New York: McGraw-Hill.

Delavari, M.; Shirin Bakhsh, S., & Dasht Bozorgi, Z. (2008). Investigating the effect of oil prices on Iran's economic growth using asymmetric convergence. Quarterly Journal of Energy Economics Studies, 5(18), 65-85. (in Persian)

Delfan, M.; Imami, M. A.; Biranvand, A., & Azimi, S. A. (2014). Investigating the effect of oil shocks on monetary variables and government expenditures, Economic Strategy, 13(4), 165-199. (in Persian)

Edwards, S. (1989). Exchange Controls, Devalutions, and Exchange Rates:  The Latin American Experience. Economic Development and Cultural Change, Vol. 37, PP. 457.494.

Eltony, M. N., & Al-Awadi, M. (2001). Oil Price Fluctuation and Their Impact on the Macroeconomic Variables of Kuwait: a case Study using a VAR Model. International Journal of Energy Research, 25: 939-959.

Emami, K., & Adibpour, M. (2009). Investigating the asymmetric effects of oil shocks on production. Economic Modeling Quarterly, 3(10), 1-26. (in Persian)

Farzam, V.; Ansari Nasab, M., & Kurdi, K. R. (2017). Investigating the impact of oil price shocks on employment in selected oil exporting countries. Applied economics, 7(20), 23-34. (in Persian)

Farzanegon, M., & Markwardt, G. (2006). The Effect of oil price shocks on the Iranian Economy: Applying a VAR Model, Quarterly Energy Economics Review. vol.3. NO.10

Fisher, Stanly. (1993). The Role of Macroeconomic Factor in Growth, Journal of Monetary Economics, Vol. 32, PP. 485-516.

Gomex-Loscos, A.; Motaada, A., & Mara Dolores Gadea, M. (2009). The Impact of oil shocks on the Spanish Economy. ERSA conference papers ersall. P. 835. European Regional science Association.

Hamilton, J. (1988). A neoclassical Model of Unemployment and the Business Cycle, The Journal of Political Economy, 96, 3.593-617.

Hamilton, J. (1996). This is What Happened to the Oil Price- Macroeconomy Relationship? Journal of Monetary Economics, 38, 215-220.

Hamilton, J. (2000). What is an Oil Shock? Journal of Econometrics, 113, 363-398.

Hamilton, J. D. (2003). What is an Oil Shock? Journal of Economics, No.113, PP.363-398.

Hosseini Nesab, E., & Mir Kazemi Mod, M. (2009). The effect of oil shocks on selected macroeconomic variables of oil exporting and importing countries. Financial Economics, 3(7), 1-15. (in Persian)

Iqbali, A.; Halafi, H. M., & Gasgari, R. (2004). Investigating the relationship between government spending and private sector investment: a case study of Iran. Economic Research Journal, 4(12), 137-167. (in Persian)

Ivanov, V., & Kilian, L. (2005). A Practitioner's Guide to Lag Order Selection for VAR Impulse Response Analysis. Studies in Nonlinear Dynamics & Econometrics, 9(1): 1-34.

Jimenez- Rodiguez, R., & Sanchez, M. (2004). Oil price shocks and Real GDP Growth: Empiricel Evidence for same OECD Countries, Applied Economics, 3V, 201-228.

Jin, Guo. (2008). The Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth: A comparative Analysis for Russia, Japan and China, Research Journal of International Studies, Issue 8, PP. 98-111.

Khalat Bari, F. (1994). Fundamentals of Oil Economy. Sabrin Publications. (in Persian)

Kilian, L. (2008a). The Economic Effects of Energy Price Shocks, Jornal of Economic Literature, Vol.46, pp. 871-1009

Lardic, S., & Mignon, V. (2008). Oil price and Economic activity: an Asymmetric co integration Approach. Energy Economics.

Levin, A.; Lin, C. F., & Chu, C. J. (2002). Unit root tests in panel data: asymptoticfinite-sample properties, Journal of econometrics, 108: 1-24.

Lucas, Rabert. (1973). Some Internaational Evidence on Output- Inflation Trade Offs, The American Economic-Review, Vol.63, NO.3, PP. 326-334.

Mehrabi Boshrabadi, H.; Sherafatmand, H., & Baghestny, A. A. (2010). Study on the Impacts of Exchange Rate Shocks and Gap of GDP on Inflation in Iran. Monetary & Financial Economics, 17(33).‏, 173-192. (in Persian). https://doi.org/10.22067/pm.v17i33.27320.

Mehregan, N., & Salmani, U. (2014). Unforeseen Oil Price Shocks and Economic Growth in Iran: an Application of Markov Switching Regression. Journal of Iranian energy economy research, 3(12), 208-183. (in Persian).

https://doi.org/10.22067/mfe.2021.715 93.1099

Mork, K. A., & Hall, R, E. (1980). Energy Price, Inflation and Recession, 1974-1975, Energy Journal I, pp:31-63.

Motahari, M.; Lotf Alipour, M. R., & Ahmadi Shadmehri, M. T. (2017). The effects of real exchange rate on economic growth in Iran: new findings with a non-linear approach. Applied theories of economics, 15(4), 175-198. (in Persian)

Olomola, P. A., & Adejumo, A. V. (2006). Oil Price Shock and Macroeconomic Activities in Nigeria, International Research Journal of Finance and Economics, 3, 28-34.

Pierce, J. L., & Enzler, J. J. (1974). The Effect of External Inflationary Shocks, Brooking Paper on Economic Activity I, pp:13-61.

Rafig, sgro, Apergis. (2016). Asymmetric oil shocks and External Balances                

Rasche, R. H., & Tatom, J. A. (1977a). The Effects of the New Energy Regime on Economic Capacity, production, and Price, Federal Reserve Bank of St. Louis Review. 59(4): 2-12.

Sadorsky, P., 1999, Oil Price Shocks and Stock Market Activity, Energy! Economics, 21, 449-469.

Samadi, S.; Yahyaabadi, A., & Maalemi, N. (2009). Analysis of the impact of oil price shocks on macroeconomic variables in Iran, Economic Research and Policy Quarterly, 17(52). 5-26. (in Persian)

Samsami, H., & Helali, A. (2011). Investigating the asymmetry of the effect of oil revenues on the level of production and price in Iran. Journal of Economic Studies, 2(3), 51-25. (in Persian)

Shayan Zinivand, A.; Kazemi, A.; Jarjarzadeh, G.; Ghobishawi, A. K., & Gharafi., M. (2015). Analyzing the effect of exchange rate impulses, foreign investment and oil revenues on the gross domestic product in OPEC member countries with the panel autoregression approach. Quantitative Economics Research Quarterly, 11(3), 27-59. (in Persian)

Sodersten, B., & Reed, G. (1994). Internasional Economics, 3d ed. London: The Macmillan Press LTD.

Tamizi, R. (2002). Investigating the asymmetric effects of oil shocks on Iran's economic growth. Master's Thesis in Economics, Faculty of Economics, University of Tehran. (in Persian)

Tavakoli, S.; Hoshmand, M.; Salimifar, M., & Garji, E. (2017). Investigating the effect of fiscal policy as a mechanism of spreading oil shocks in Iran's economy using a structural autoregression model. Iranian Applied Economic Studies Quarterly, 6(22). 77-98. (in Persian)

DOI: 10.22084/AES.2017.12127.2312.

Yahia, A., & Metwelly, M. (2007). Impact of Fluctuations in oil prices on Libyan Economic Growth. The Middle Eest Business and Economic Review.