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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. Bernanke, Ben S. & Gertler, Mark & Waston, Mark, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Working Papers 97-25, C.V. Starr Center for Applied Economics, New York University.
  2. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October.
  3. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
  4. Robert Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," NBER Working Papers 10855, National Bureau of Economic Research, Inc.
  5. Kilian, Lutz, 2005. "Exogenous Oil Supply Shocks: How Big Are They and How Much do they Matter for the US Economy?," CEPR Discussion Papers 5131, C.E.P.R. Discussion Papers.
  6. 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.
  7. Kilian, Lutz, 2007. "The Economic Effects of Energy Price Shocks," CEPR Discussion Papers 6559, C.E.P.R. Discussion Papers.
  8. Hooker, Mark A., 1996. "This is what happened to the oil price-macroeconomy relationship: Reply," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 221-222, October.
  9. 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, vol. 6(1), pages 78-121, 03.
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