Oil price shocks and macroeconomic adjustments in oil-exporting countries

Wee Koh

    Research output: Contribution to journalArticle


    This paper examines the macroeconomic effects of an adverse oil price shock under different exchange rate and fiscal policy arrangements in 40 oilexporting 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 shockabsorbing 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.
    Original languageEnglish
    Pages (from-to)187-210
    JournalInternational Economics and Economic Policy
    Issue number2
    Publication statusPublished - 2017


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