The asymmetric effects of oil price on economic growth in Turkey and Saudi Arabia: new evidence from nonlinear ARDL approach

The immediate purpose of this paper is to examine and compare the potential asymmetric oil price effects on real GDP growth in two different countries with differing dependence on oil from the Middle East: Saudi Arabia and Turkey. Saudi Arabia is the major producer of oil in the global market while Turkey is a major user of oil from the region. How do oil price shocks impact on the economic growth of these two major economies from the Middle East? The analysis progresses in three stages: first, we offer a baseline model to explain how oil price shocks can have real effects through their impacts on inflationary expectations and relative price movements. Secondly, a linear ARDL model is tested to explore the long-run dynamics of relative prices and oil price changes. Thirdly, and most importantly, the empirical analysis employs an innovative nonlinear ARDL model proposed by Shin et al (2014) to estimate the asymmetric long and short run impacts of oil prices. The empirical findings reveal that there is a strong evidence for a stable long run relationship between real GDP, oil price and other explanatory variables. In particular, the asymmetric analysis provides significant results on the difference of the economic growth responses to both positive and negative shocks of oil price. In the case of Saudi Arabia, real GDP response to positive oil shocks is important with larger magnitude compare to the negative shock. On the other hand, real GDP in Turkey react to a positive oil price shock is lower than its react to a negative shock. Our empirical results are extremely important for policy makers regarding the oil production process to achieve sustainable economic growth.