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The macroeconomic effects of oil price fluctuations on a small open oil-producing country: The case of Trinidad and Tobago

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  • Lorde, Troy
  • Jackman, Mahalia
  • Thomas, Chrystol

Abstract

Using vector autoregressive (VAR) methodology, this paper empirically investigates the macroeconomic effects of oil price fluctuations on Trinidad and Tobago. Overall, we find that the price of oil is a major determinant of economic activity of the country. Our impulse response functions suggest that following a positive oil price shock, output falls within the first two years followed by positive and growing response. We also investigate the macroeconomic impact of oil price volatility. Results suggest that an unanticipated shock to oil price volatility brings about random swings in the macroeconomy; however, only government revenue and the price level exhibit significant responses. With regard to the magnitude of the responses, shocks to oil price volatility tend to yield smaller macroeconomic impacts in comparison to shocks to oil prices. Variance decompositions suggest that the price of oil is a major component of forecast variation for most macroeconomic variables. Finally, Granger-causality tests indicate causality from oil prices to output and oil prices to government revenue.

Suggested Citation

  • Lorde, Troy & Jackman, Mahalia & Thomas, Chrystol, 2009. "The macroeconomic effects of oil price fluctuations on a small open oil-producing country: The case of Trinidad and Tobago," Energy Policy, Elsevier, vol. 37(7), pages 2708-2716, July.
  • Handle: RePEc:eee:enepol:v:37:y:2009:i:7:p:2708-2716
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    References listed on IDEAS

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    Cited by:

    1. Zhang, Chuanguo & Chen, Xiaoqing, 2011. "The impact of global oil price shocks on China’s stock returns: Evidence from the ARJI(-ht)-EGARCH model," Energy, Elsevier, vol. 36(11), pages 6627-6633.
    2. repec:pal:assmgt:v:18:y:2017:i:1:d:10.1057_s41260-016-0030-7 is not listed on IDEAS
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    4. Dizaji, Sajjad Faraji, 2014. "The effects of oil shocks on government expenditures and government revenues nexus (with an application to Iran's sanctions)," Economic Modelling, Elsevier, vol. 40(C), pages 299-313.
    5. Sharma, Susan Sunila, 2010. "The relationship between energy and economic growth: Empirical evidence from 66 countries," Applied Energy, Elsevier, vol. 87(11), pages 3565-3574, November.
    6. Akpaeti, Aniekan Jim, 2. "Does Financial Sector Reforms Affect Agricultural Investments In Nigeria? A Cointegration And Var Approach," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 1.
    7. Necibi, Thameur & Issaoui, Fakhri, 2013. "The impact of oil prices on economic activity in administrated price structure: the case of Tunisia," MPRA Paper 50420, University Library of Munich, Germany.
    8. repec:eee:eneeco:v:70:y:2018:i:c:p:297-306 is not listed on IDEAS
    9. Heinrich Blechinger, Philipp Friedrich & Shah, Kalim U., 2011. "A multi-criteria evaluation of policy instruments for climate change mitigation in the power generation sector of Trinidad and Tobago," Energy Policy, Elsevier, vol. 39(10), pages 6331-6343, October.
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    11. Leonardo Quero-Virla, 2016. "Macroeconomic Effects of Oil Price Fluctuations in Colombia," DOCUMENTOS DE TRABAJO CIEF 015647, UNIVERSIDAD EAFIT.
    12. Aktas, Erkan & Özenç, Çiğdem & Arıca, Feyza, 2010. "The Impact of Oil Prices in Turkey on Macroeconomics," MPRA Paper 8658, University Library of Munich, Germany, revised 15 Jun 2010.
    13. Elsiddig Rahma & Noel Perera & Kian Tan, 2016. "Impact of Oil Price Shocks on Sudan’s Government Budget," International Journal of Energy Economics and Policy, Econjournals, vol. 6(2), pages 243-248.
    14. Özlale, Ümit & Pekkurnaz, Didem, 2010. "Oil prices and current account: A structural analysis for the Turkish economy," Energy Policy, Elsevier, vol. 38(8), pages 4489-4496, August.
    15. Liu, Chang & Sun, Xiaolei & Chen, Jianming & Li, Jianping, 2016. "Statistical properties of country risk ratings under oil price volatility: Evidence from selected oil-exporting countries," Energy Policy, Elsevier, vol. 92(C), pages 234-245.
    16. Soytas, Ugur & Oran, Adil, 2011. "Volatility spillover from world oil spot markets to aggregate and electricity stock index returns in Turkey," Applied Energy, Elsevier, vol. 88(1), pages 354-360, January.
    17. Priyanshi Gupta & Anurag Goyal, 2015. "Impact of oil price fluctuations on Indian economy," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 39(2), pages 141-161, June.
    18. repec:eee:energy:v:139:y:2017:i:c:p:975-990 is not listed on IDEAS
    19. Lin, Boqiang & Wesseh, Presley K. & Appiah, Michael Owusu, 2014. "Oil price fluctuation, volatility spillover and the Ghanaian equity market: Implication for portfolio management and hedging effectiveness," Energy Economics, Elsevier, vol. 42(C), pages 172-182.
    20. Al-mulali, Usama, 2010. "The Impact of Oil Prices on the Exchange Rate and Economic Growth in Norway," MPRA Paper 24447, University Library of Munich, Germany.
    21. Pablo-Romero, María del P. & Sánchez-Braza, Antonio, 2015. "Productive energy use and economic growth: Energy, physical and human capital relationships," Energy Economics, Elsevier, vol. 49(C), pages 420-429.
    22. Iwayemi, Akin & Fowowe, Babajide, 2011. "Impact of oil price shocks on selected macroeconomic variables in Nigeria," Energy Policy, Elsevier, vol. 39(2), pages 603-612, February.

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