Impact of oil price on inflation, trade balance and economic growth in African OPEC member countries
This study examined the impact of oil price on inflation, trade balance and economic growth in African OPEC member countries. The study applied transmitted channels of oil price to various economic sectors as a theoretical framework. Moreover, this study used annual panel data of four African OPE...
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| Format: | Thesis |
| Language: | English |
| Published: |
2017
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| Online Access: | http://psasir.upm.edu.my/id/eprint/70835/1/FEP%202017%2016%20-%20IR.pdf http://psasir.upm.edu.my/id/eprint/70835/ |
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| Summary: | This study examined the impact of oil price on inflation, trade balance and economic
growth in African OPEC member countries. The study applied transmitted channels
of oil price to various economic sectors as a theoretical framework. Moreover, this
study used annual panel data of four African OPEC members namely Algeria, Angola,
Libya and Nigeria ranging from 1995 to 2014. Within this period the African OPEC
countries witnessed a rapid increase in economic growth as oil price increases, while
decreases in oil price produce ambiguity. In addition, this study used three different
proxies of oil price in the analysis namely specific spot oil price of individual
countries, OPEC reference oil price and an average of Brent, Dubai and West Texas
Intermediate (WTI) oil price.
The first objective of this study is to explore the non-linear impact of oil price on
inflation in African OPEC members. The inflation rate is usually volatile in response
to oil price changes. The dynamic panels ARDL (PMG and MG models) were used to
examine the short and the long-run impact of oil price changes on inflation. In the
linear models, this study found that the long-run coefficient of oil price, money supply,
exchange rate and GDP are positively encouraging inflation while food production
negatively influenced inflation. We further estimated the model using NARDL
specification which decomposing the oil price into positive and negative changes. In
the nonlinear model, the study found that the positive and negative changes in oil price
are positively encouraging inflation but the impact is larger when oil price dropped.
Motivated by whether the the OPEC members can improve their trade balance via
higher oil price or higher oil export, the second objective of this study examines the
threshold effect of oil price on the trade balance in African OPEC members. Then, this
study investigated the impacts of oil export as a substitute proxy of oil price on the
trade balance models. The Panel fully modified OLS and dynamic OLS estimators to examine the long-run impact of oil price on import, export and trade balance. This
study found that increase in oil price and oil export positively encourage import, export
and trade balance while exchange rate depreciation significantly discourages import
and insignificantly in export and trade balance models. From the results of trade
balance, the study found that there is a threshold effect of oil export. Increase in oil
export improves the trade balance when oil export is above a certain threshold.
It is observed that economic growth of African OPEC members showed larger
adjustment during the fall of oil price compared to the hike in oil price and this may
due to different level of financial development. The third objective of this study
investigates the threshold effect of oil price and financial development on economic
growth in African OPEC members. The fully modified OLS and dynamic OLS were
used to examine the long-run impact of oil price on economic growth. The findings
portrayed that increases in oil price positively encourage economic growth and better
financial development leads to higher economic growth in African OPEC countries.
Based on the threshold results, the study found that the threshold effect of financial
development is significant and has a larger impact when it is above the threshold.
The policy implications from this study are: (1) The policy makers should use different
policy between positive and negative oil price changes as shown that inflation is high
when oil price decrease. The policy makers can use the contractionary monetary policy
to reduce the inflation rate. In additiona, the government should encourage domestic
food production both in quantity and quality in order to reduce inflation. (2) For those
countries that are highly dependent on oil export, the government can increase oil
export to improve the trade balance. (3) In promoting economic growth, the
government can make necessary effort to benefit from higher oil prices but emphasize
a need to encourage investing in financial services for stronger financial development,
hence promote economic growth in African OPEC member countries. |
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