The Impact of Oil Price Shocks on the Macroeconomic Variables of Major Oil Exporting Countries: A GVAR Approach

In a world scale economy considering interlinkage and interactions between countries, economic shocks will affect various economies through channels. Meantime, the oil price is one of the most important channels. New studies show that the connection between the oil price and the world economy has numerous complications which could not be incorporated in traditional frames with only taking into consideration separated and identified oil supply and demand shocks without considering synchronicity and the source of the main shocks. Therefore it is essential to model a multi-dimensional system. The purpose of this study is to investigate the impact of oil price shocks on the major macroeconomic variables of oil-exporting countries from 1974Q1 to 2019Q4 using the global vector autoregressive (GVAR) approach. The macroeconomic variables include four domestic variables, three foreign variables and one global variable. In particular, it provides a theoretical framework for the global oil market to illustrate how multi-country approach to modeling oil markets can be used to identify country-specific oil price shocks. On the empirical side, it shows the global economic implications of oil price shocks vary considerably depending on which country is subject to the shock. The results of this study indicate that the economic consequences of a positive oil price shock are different on macroeconomic variables in oil-exporting countries in short-run and long-run. However, in response to a positive oil price shock, most of OPEC countries experience long-run inflationary pressures.