International Economics and Economic Policy

, Volume 14, Issue 2, pp 187–210 | Cite as

Oil price shocks and macroeconomic adjustments in oil-exporting countries

  • Wee Chian Koh
Original Paper


This paper examines the macroeconomic effects of an adverse oil price shock under different exchange rate and fiscal policy arrangements in 40 oil-exporting countries from 1973 to 2010 using panel vector autoregression techniques. The results show that output and government consumption fall in response to an oil price decline. However, the output response is significantly smaller and smoother in countries with flexible exchange rate regimes due to a larger and immediate real exchange rate depreciation. There is also less need for contractionary fiscal policy as the real depreciation appears to play a sufficient dampening role. In contrast, countries with fixed exchange rate regimes experience a small and delayed real depreciation, leaving fiscal policy to bear the bulk of the macroeconomic adjustments costs. Nevertheless, the presence of oil funds in these countries is associated with smaller fiscal spending cuts and hence a reduced output fall. These findings highlight the shock-absorbing property of flexible exchange rates and the potential macroeconomic stabilisation role of oil funds in insulating against adverse oil price movements, making a case for oil exporters to adopt more flexible exchange rate regimes and establish oil funds as fiscal buffers.


Panel VAR Oil price shock Exchange rate regime Oil fund Oil-exporting countries 

JEL Classifications

C33 E62 F41 O13 Q43 



I thank Warwick McKibbin, Renée Fry-McKibbin, Joshua Chan, Fabrizio Carmignani, Alrick Campbell and participants at the 11th Australasian Development Economics Workshop (ADEW), Singapore Economic Review Conference 2015, 28th PhD Conference in Economics and Business and the ANU Crawford PhD Conference 2015 for useful comments and feedback. I gratefully acknowledge funding from ADEW, ANU Vice Chancellor’s Travel Grant and ANU Crawford School of Public Policy to present this paper at the conferences. I also thank Inessa Love and Ryan Decker for sharing their codes. I am also indebted to an anonymous referee for valuable suggestions to improve the manuscript.

Compliance with Ethical Standards

This research is supported by the Centre for Strategic and Policy Studies (CSPS), Brunei Darussalam, where I am employed as an Associate Researcher. I declare that there are no other relevant or material financial interests that relate to the research described in this paper.


  1. Al-Abri A (2013) Oil price shocks and macroeconomic responses: does the exchange rate regime matter? OPEC Energy Rev 37:1–19CrossRefGoogle Scholar
  2. Anderson T, Hsiao C (1982) Formulation and estimation of dynamic models using panel data. J Econometrics 18:47–82CrossRefGoogle Scholar
  3. Arellano M, Bover O (1995) Another look at the instrumental variable estimation of error-components models. J Econometrics 68:29–51CrossRefGoogle Scholar
  4. Arezki R, Blanchard O (2014) Seven questions about the recent oil price slump. iMFdirect. 22 December, web:
  5. Asik G (2013) Stabilization funds in oil-rich countries and fiscal policy: (a)cyclicality? Job Market Paper, London School of Economics, United KingdomGoogle Scholar
  6. Belke A, Gros D (2014) A simple model of an oil based savings glut – the “China factor“ and the OPEC cartel. Int Econ Econ Policy 11:413–430CrossRefGoogle Scholar
  7. Bernanke B, Gertler M, Watson M (1997) Systematic monetary policy and the effects of oil price shocks. Brookings Pap Econ Act 1:91–157CrossRefGoogle Scholar
  8. Broda C (2004) Terms of trade and exchange rate regimes in developing countries. J Int Econ 63:31–58CrossRefGoogle Scholar
  9. Calvo A, Reinhart C (2002) Fear of floating. Q J Econ 117:379–408CrossRefGoogle Scholar
  10. Chia W, Cheng T, Li M (2012) Exogenous shocks and exchange rate regimes. World Econ 35:444–460CrossRefGoogle Scholar
  11. Coutinho L, Georgiou D, Heracleous M, Michaelides A, Tsani S (2014) Limiting fiscal procyclicality: evidence from resource-rich countries. CEPR Discussion Paper No. 9672. Centre for Economic Policy Research, LondonGoogle Scholar
  12. Crain M, Devlin J (2003) Nonrenewable resource funds: a red herring for fiscal stability? Paper presented at the annual meeting of the American Political Science Association, PhiladelphiaGoogle Scholar
  13. Darvas Z (2012) Real effective exchange rates for 178 countries: a new database. Bruegel Working Paper No. 2012/06, BruegelGoogle Scholar
  14. Davis J, Ossowski R, Daniel J, Barnett S (2001) Stabilization and savings funds for nonrenewable resources: experience and fiscal policy implications. IMF Occasional Paper No. 205. International Monetary Fund, WashingtonGoogle Scholar
  15. Edwards S, Levy-Yeyati E (2005) Flexible exchange rates as shock absorbers. Eur Econ Rev 49:2079–2105CrossRefGoogle Scholar
  16. Erbil N (2011) Is fiscal policy procyclical in developing oil-producing countries? IMF Working Paper No. 11/171. International Monetary Fund, WashingtonGoogle Scholar
  17. Frankel J (2005) Peg the export price index: a proposed monetary regime for small countries. J Policy Model 27:495–508CrossRefGoogle Scholar
  18. Friedman M (1953) The case for flexible exchange rates. In: Essays in positive economics. University of Chicago Press, Chicago, pp 157–203Google Scholar
  19. Hoffmann M (2007) Fixed versus flexible exchange rates: evidence from developing countries. Economica 74:42–49CrossRefGoogle Scholar
  20. Holtz-Eakin D, Newey W, Rosen H (1988) Estimating vector autoregressions with panel data. Econometrica 56:1371–1395CrossRefGoogle Scholar
  21. Ilzetzki E, Vegh C (2008) Procyclical fiscal policy in developing countries: truth or fiction? NBER Working Paper No. 14191. National Bureau of Economic Research, CambridgeCrossRefGoogle Scholar
  22. Ilzetzki E, Reinhart C, Rogoff K (2010) Exchange rate arrangements entering the 21st century: which anchor will hold? web:
  23. Im K, Pesaran M, Shin Y (2003) Testing for units roots in heterogenous panels. J Econometrics 115:53–74CrossRefGoogle Scholar
  24. IMF (2015) Regional economic outlook update: Middle East and Central Asia. International Monetary Fund, WashingtonGoogle Scholar
  25. Kaminsky G, Reinhart C, Vegh C (2004) When it rains, it pours: procyclical capital flows and macroeconomic policies. NBER Macroecon Annu 19:11–53CrossRefGoogle Scholar
  26. Kilian L (2009) Not all oil price shocks are alike: disentangling demand and supply shocks in the crude oil market. Am Econ Rev 99:1053–1069CrossRefGoogle Scholar
  27. Kilian L (2014) Oil price shocks: causes and consequences. Annu Rev Resour Econ 6:133–54CrossRefGoogle Scholar
  28. Klein M, Shambaugh J (2006) The nature of exchange rate regimes. NBER Working Paper No. 12729. National Bureau of Economic Research, CambridgeCrossRefGoogle Scholar
  29. Klein M, Shambaugh J (2010) Exchange rate regimes in the modern era. MIT Press, CambridgeGoogle Scholar
  30. Kuncic A (2014) Institutional quality database. J Inst Econ 10:135–161Google Scholar
  31. Levy-Yeyati E, Sturzenegger F (2005) Classifying exchange rate regimes: deeds vs. words. Eur Econ Rev 49:1603–1635CrossRefGoogle Scholar
  32. Love I, Zicchino L (2006) Financial development and dynamic investment behaviour: evidence from panel VAR. Q Rev Econ Financ 46:190–210CrossRefGoogle Scholar
  33. Mork K (1989) Oil and the macroeconomy when prices go up and down: an extension of Hamilton’s results. J Polit Econ 97:740–744CrossRefGoogle Scholar
  34. Neal T (2014) Panel cointegration analysis with xtpedroni. Stata J 14:684–692Google Scholar
  35. Nickell S (1981) Biases in dynamic models with fixed effects. Econometrica 49:1417–1426CrossRefGoogle Scholar
  36. Ossowski R, Villafuerte M, Medas P, Thomas T (2008) Managing the oil revenue boom: the role of fiscal institutions. IMF Occasional Paper No. 260. International Monetary Fund, WashingtonGoogle Scholar
  37. Pedroni P (2004) Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Economet Theor 20:597–625CrossRefGoogle Scholar
  38. Persyn D, Westerlund J (2008) Error correction based cointegration tests for panel data. Stata J 8:232–241Google Scholar
  39. Poole W (1970) Optimal choice of monetary policy instruments in a simple stochastic macro model. Q J Econ 84:197–216CrossRefGoogle Scholar
  40. Reinhart C, Rogoff K (2004) The modern history of exchange rate arrangements: a reinterpretation. Q J Econ 119:1–48CrossRefGoogle Scholar
  41. Rogoff K, Husain A, Mody A, Brooks R, Oomes N (2004) Evolution and performance of exchange rate regimes. IMF Occasional Paper No. 228. International Monetary Fund, WashingtonGoogle Scholar
  42. Roodman D (2009) How to do xtabond2: an introduction to “difference” and “system” GMM in Stata. Stata J 9:86–136Google Scholar
  43. Setser B (2008) The case for exchange rate flexibility in oil-exporting economies. PIIE Policy Brief No. PB07-8. Peterson Institute for International Economics, WashingtonGoogle Scholar
  44. Shabsigh G, Ilahi N (2007) Looking beyond the fiscal: do oil funds bring macroeconomic stability? IMF Working Paper No. 07/96. International Monetary Fund, WashingtonGoogle Scholar
  45. Shambaugh J (2004) The effect of fixed exchange rates on monetary policy. Q J Econ 119:301–352CrossRefGoogle Scholar
  46. Sovereign Wealth Fund Institute (2015) SWF Rankings. web:
  47. Sugawara N (2014) From volatility to stability in expenditure: stabilization funds in resource-rich countries. IMF Working Paper No. 14/43. International Monetary Fund, WashingtonGoogle Scholar
  48. Tavlas G, Dellas H, Stockman A (2008) The classification and performance of alternative exchange-rate systems. Eur Econ Rev 52:941–963CrossRefGoogle Scholar
  49. Truman E (2008) A blueprint for sovereign wealth fund best practices. PIIE Policy Brief No. PB08-3. Peterson Institute for International Economics, WashingtonGoogle Scholar
  50. Tsani S (2013) Natural resources, governance and institutional quality: the role of resource funds. Resour Policy 38:181–195CrossRefGoogle Scholar
  51. Westerlund J (2007) Testing for error correction in panel data. Oxford B Econ Stat 69:709–748CrossRefGoogle Scholar
  52. World Bank Group (2015) Global economic prospects, January 2015: having fiscal space and using it. World Bank, WashingtonGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  1. 1.Centre for Applied Macroeconomic Analysis (CAMA), Crawford School of Public Policy, College of Asia & the PacificThe Australian National UniversityActonAustralia
  2. 2.Centre for Strategic and Policy Studies (CSPS)Bandar Seri BegawanBrunei Darussalam

Personalised recommendations