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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

Abstract

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.

Keywords

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

JEL Classifications

C33 E62 F41 O13 Q43 

Notes

Acknowledgments

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.

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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

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