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The Impact of Oil Shocks on the South African Economy

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Author Info

  • Carolyn Chisadza

    ()
    (Department of Economics, University of Pretoria)

  • Janneke Dlamini

    ()
    (Department of Economics, University of Pretoria)

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Mampho P. Modise

    ()
    (Department of Economics, University of Pretoria)

Abstract

The recent increases in oil prices have raised the importance of studying the effects of oil supply and demand shocks on an economy. The purpose of this paper is to investigate the impact of the oil supply and demand shocks on the South African economy using a sign restriction-based structural Vector Aautoregressive (VAR) model. Our results show that an oil supply shock has a short-lived significant impact only on the inflation rate, while the impact on the other variables is statistically insignificant. Supply disruptions results in a short-term increase in the domestic inflation rate with no reaction from the monetary policy. An aggregate demand shock results in short- to medium-term improvements in domestic output and the real exchange rate. The effect is statistically insignificant for the inflation rate as well as the monetary policy instrument. The inflation rate and the real exchange rate react negatively to an oil-specific demand shock, while output is positively related to unanticipated changes in oil price due to speculations.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201311.

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Length: 11 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:pre:wpaper:201311

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Keywords: Oil price shocks; macroeconomic variables; vector autoregression; monetary policy;

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References

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  1. Hooker, Mark A, 2002. "Are Oil Shocks Inflationary? Asymmetric and Nonlinear Specifications versus Changes in Regime," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 34(2), pages 540-61, May.
  2. Robert B. Barsky & Lutz Kilian, 2001. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Working Papers 8389, National Bureau of Economic Research, Inc.
  3. G. Peersman & I. Van Robays, 2009. "Oil and the Euro Area Economy," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 09/582, Ghent University, Faculty of Economics and Business Administration.
  4. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 46(4), pages 871-909, December.
  5. Barsky, Robert & Kilian, Lutz, 2004. "Oil and the Macroeconomy Since the 1970s," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4496, C.E.P.R. Discussion Papers.
  6. C. Baumeister & G. Peersman & I. Van Robays & -, 2009. "The Economic Consequences of Oil Shocks: Differences Across Countries and Time," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 09/630, Ghent University, Faculty of Economics and Business Administration.
  7. Gert Peersman & Christiane Baumeister, 2009. "Time-Varying Effects of Oil Supply Shocks on the US Economy," 2009 Meeting Papers, Society for Economic Dynamics 171, Society for Economic Dynamics.
  8. Lutz Kilian, 2008. "Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy?," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 216-240, May.
  9. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
  10. Lutz Kilian, 2008. "A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and Inflation in the G7 Countries," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(1), pages 78-121, 03.
  11. Hooker, Mark A., 1996. "This is what happened to the oil price-macroeconomy relationship: Reply," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(2), pages 221-222, October.
  12. Fofana, Ismaél & Chitiga, Margaret & Mabugu, Ramos, 2009. "Oil prices and the South African economy: A macro-meso-micro analysis," Energy Policy, Elsevier, Elsevier, vol. 37(12), pages 5509-5518, December.
  13. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
  14. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, American Economic Association, vol. 99(3), pages 1053-69, June.
  15. McDonald, Scott & van Schoor, Melt, 2005. "A Computable General Equilibrium (CGE) Analysis of the Impact of an Oil Price Increase in South Africa," Working Paper Series, PROVIDE Project 15633, PROVIDE Project.
  16. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(2), pages 195-213, October.
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Cited by:
  1. Rangan Gupta & Mampho P. Modise, 2013. "Does the Source of Oil Price Shocks Matter for South African Stock Returns? A Structural VAR Approach," Working Papers, University of Pretoria, Department of Economics 201318, University of Pretoria, Department of Economics.

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