Oil Price Fluctuations and Macroeconomic Performances in Asian and Oceanic Economies

1. Oil Price Fluctuations and Macroeconomic Performances in Asian and Oceanic Economies Youngho Chang Division of Economics Nanyang Technological University 30th USAEE/IAEE North American Conference 9 – 12 October 2011 Capital Hilton, Washington, D.C.

2. Outline • Introduction • Oil price fluctuations and the economy • Causality between oil prices and macroeconomic variables • Objectives • Data • Test Results and Interpretations • Impulse response • Variance decomposition • Conclusions

3. Oil Price Fluctuations and the Economy • Macroeconomic implications of oil price shocks identified since the 1970s • Research largely indicated a negative relationship, with oil price increases preceding almost all recessions in the United States after World War II • Hamilton (1983, 1996 and 2004) • Gisser and Goodwin (1986) • Burbridge and Harrison (1984) • Since then, other country studies have been conducted that further support this stand; • New Zealand (Gounder and Barleet, 2007) • Greece (Papapetrou, 2001) • However, a declining oil-price and macroeconomic relationship has also been found • Mork et al. (1989, 1994) • Abeysinghe(2001)

4. Summary of Literature Review

5. Causality between Oil Prices and Macroeconomic Variables • Early studies have found the inverse relationship with oil price and particularly GDP (Hamilton, 1983) • Most studies indicated causality running from oil price to real GDP or economic growth, especially for oil-importing countries • Lescarouxand Mignon (2008); Du, He and Wei(2010); Cunadoand Gracia (2005) • However, there are also studies which show no causality between the two • Bartleetand Gounder (2007); Li, Ran and Voon (2010) • General results of causality running from oil price to inflation has been found • Lescarouxand Mignon (2008); Du, He and Wei (2010); Cunado and Garcia (2005); Jalles(2009) • For unemployment, most countries indicated a causality running from oil price to unemployment • (Lescaroux and Mignon, 2008)

6. Summary of Granger Causality Studies Note: → denotes the direction of Granger-Causality while ↔denotes bi-directional Granger-Causality

7. Objectives • To explore the impact of oil price fluctuations on macroeconomic variables for economies in ASEAN, the Asia-Oceanic Region and South Asia • To investigate the varied patterns of the impact by different categories of economies in the region • Oil-exporting economies • Small-open economies • Large countries with rapid economic growth

8. Vector Autoregression Model (VAR) • Investigate the relationship between oil price and the macroeconomic variables • When they are not cointegrated • Equation: • y is an n-vector of endogenous variables • Bkis an (n × n) matrix of regression coefficients to be estimated. • The error term, ut, is assumed to be independent and identically distributed with a zero mean and constant variance. • Selection of the appropriate lag length, p, is important. 4 is chosen

9. Data • Variables • GDP, CPI and unemployment rate • Scope • 17 countries (Asia-Pacific and ASEAN region) • Sources • CEIC data manager • International Financial Statistics (IFS) CD-ROM 2010 • Specific government sources and websites • Type of Oil • Dubai crude “Arab Gulf Dubai” measured in FOB $US/BBL

10. Unit Root Tests for Stationarity • Phillip-Perron (PP) unit root tests are conducted • Null hypothesis • Series are non-stationary • If the p-value is less that 0.1 (10% level of significance), the null hypothesis of non-stationarity is rejected

11. Unit Root Tests for Stationarity: GDP • GDP Time-Series • All series show non-stationarity except for the Philippines and Vietnam • Oil Price Series Corresponding to the GDP • All except for the Philippines *Brunei and Vietnam were not be examined due to different orders of integration

12. Unit Root Tests for Stationarity: CPI • CPI Time-Series  • Australia, Brunei, China, Japan, the Philippines and South Korea • Null hypothesis of non-stationarity is rejected • All other countries are non-stationary • Oil Price Series Corresponding to the CPI • The Philippines: Null hypothesis for is rejected • Other countries: Rejected for the first differences • Australia, Brunei, China, Japan and South Korea • Not studied due to different orders of integration

13. Unit Root Tests for Stationarity: Unemployment • Unemployment Rate Series  • More varied results due to smaller sample sizes • Brunei, Cambodia, Malaysia and Thailand • Null hypothesis of non-stationarity is rejected • The remaining countries (except for China and Vietnam) • Rejected for the first differences • Oil Price Series Corresponding to the Unemployment Rate • Non-stationarityis rejected only for Indonesia • The remaining series except Cambodia • Rejected for first differences • Analysis omitted for 7 countries due to different order of integration

14. 33 (shaded) out of 49 pairs of variables proceeded with the cointegration test

15. Cointegration Test • Engle-Grangercointegration test • The critical value calculated according to the equation is -1.61 by MacKinnon (2010) • If the absolute value of the statistic is greater than |-1.61| • Null hypothesis is rejected • Proceed with Vector Error Correction model (VECM) • If the absolute value of the statistic is less than |-1.61| • No cointegration between the two variables • Variance auto-regression (VAR) model adopted

16. Cointegration Test • GDP and Oil Price • Australia, India, Japan, South Korea and Thailand • No cointegration • CPI and Oil Price • India, Indonesia, Laos, Taiwan and Thailand • No cointegration • Malaysia, Myanmar, New Zealand, Singapore and Vietnam • Cointegration detected • Unemployment Rate and Oil Price • Australia, Japan, New Zealand, the Philippines, Singapore, South Korea and Taiwan • Cointegration

17. Cointegration Test • Observations of cointegration • GDP and oil price series: 9 countries • CPI and oil price series: 6 countries • Unemployment rate and oil price series: 7 countries • Mainly in developed Asian countries • Australia, Japan, New Zealand, Singapore, South Korea and Taiwan • Developing nations studied have no cointegrating relationship

18. Shaded boxes indicate cointegration • “-“ represents no cointegration between the variables (not integrated of the same order)

19. Vector Error Correction Model (VECM) • For two cointegrated variables, the VECM describes the data-generating process • The Error Correction Term (ECT) shows how fast the relationship between the two variables converges towards its long-run equilibrium • Impulse-Response Analysis • Variance Decomposition

20. Impulse Response Functions • Impact of a one standard deviation shock to the real oil price on three variables • GDP • CPI • Unemployment Rate • Study of the 8-year impact • Depicted through graphical means

21. Impulse Response Analysis for GDP Varied impact of an oil price shock on GDP • Singapore and Taiwan • Small-open economies • Delayed negative impact • Consistent with findings of previous studies • Malaysia and Indonesia • Net oil exporters in the past • Long-run positive impact on GDP due to critical nature of oil, short run inelastic demand • Strong support from some studies

22. Impulse Response Analysis for GDP Varied impact of an oil price shock on GDP • China • Large economy with strong growth • Positive GDP impact from oil shock • Most energy needs met by coal, not oil • Robust economic growth in the past despite increases in oil prices • Contradictory conclusions from some studies • New-Zealand • Another small open economy • Immediate negative impact followed by positive trend • Positive and delayed effect from trading partners, China and Australia

23. Impulse Response Analysis for CPI • Malaysia, New Zealand, Singapore Vietnam • Instantaneous increase after oil price shock • But the inflationary increase is small • Improved Central Bank credibility in fighting inflation • Even smaller impact for oil exporting nations • Cambodia • Lagged inflationary impact • Transmission through trading partners such as Vietnam and Thailand

24. Impulse Response Analysis for Unemployment • Australia, Japan, New Zealand, Singapore, South Korea • Lagged positive impact of an oil price shock on the unemployment rate • Increase in unemployment rate after four or five years; support from past study • However, scale of increase is nominal • Taiwan • No lag; immediate uptick • Flexible labor market • Australia • Delayed positive impact, but subsiding effect on unemployment rate • Commodity-linked economy; benefits from commodity price increase • Long-lasting impact on unemployment rate (3 years)

25. Variance Decomposition • Impact of real oil price fluctuations on the long-run volatility of three variables • GDP • CPI • Unemployment Rate • Study of the 8-year impact • Depicted through graphical means

26. Variance Decomposition for GDP • Most economies including Cambodia, China, Indonesia, Malaysia, Myanmar, Singapore • An oil price shock is a considerable source of GDP volatility • Impact not uniform over time • Increasing impact for China and Indonesia • Decreasing impact for Cambodia and Singapore

27. Variance Decomposition for CPI and Unemployment • Substantial source of disturbance to CPI volatility over all examined countries • Oil price shocks account for over 10% of CPI variance with an increasing impact over time • Limited studies for comparison • New Zealand and Singapore CPI volatility through oil has been studied previously • Little research has examined the importance of an oil price shock on unemployment rate • Varied results across economies • Substantial impact on New Zealand, Philippines and Taiwan, but negligible for Australia, Japan and Singapore.

28. Granger-Causality  In bold, Granger-Causality runs from oil price to the considered variable at 10% significance level.

29. Conclusions • Countries are classified according to their macroeconomic characteristics to form three broad categories • Asian countries that export oil and are in a position to gain an advantage from a positive oil price shock • Small open economies for which trade plays a big role in their economic activity • Large, rapidly growing economies

30. Conclusions • Asian Oil-exporting economies • Includes Malaysia and Indonesia • Increase in the oil price causes their GDP to increase • Large percentage of the volatility in GDP is contributed by oil price variance • Signifies that oil price plays a substantial role in influencing their GDP • Small open economies • Includes Singapore, New Zealand and Taiwan • Negatively impacted by an oil price shock in the short-run but improves in the long-run • Indirect positive effect through major trading partners causes resurgence in their economic activity • Large and fast growing economies • Includes China and India • Negligible impact of an oil price shock on GDP • Small reliance on oil as a source of energy

31. Thank you for your attention!