Permanent and Temporary Oil Price Shocks, Macroeconomic Policy, and Tradable Non-oil Sector: Case of Azerbaijan, Kazakhstan, and Russia

This paper examines the economic effects of permanent and temporary oil price shocks in three oil exporting countries (Azerbaijan, Kazakhstan, and Russia) using the five variable (real short-term interest rate, real effective exchange rate, real budget expenditure, real imports, and real tradable non-oil production) VARX model with two exogenous variables which represent the corresponding shocks. The impulse response analysis conducted over the quarterly data from 2003:I to 2015:IV shows that in Azerbaijan, a permanent oil price shock produces a significantly positive effect on all variables but interest rate, while a temporary oil price shock has a significant and positive effect only on imports and exchange rate. For Kazakhstan, the impulse response functions show that a permanent oil price shock significantly and positively affects interest rate, imports, and budget expenditure; a temporary oil price shock has a significantly positive influence on all variables except budget expenditure. In Russia, a permanent oil price shock produces a significantly positive effect on all variables; a temporary oil price shock exerts a significantly positive effect on all variables but interest rate. Contrary to the permanent income hypothesis, the budget expenditure in Russia responds both to the permanent and temporary oil price shocks. Such divergence from the hypothesis can be explained by the specifics of the policy on the oil revenue spending. As regards the presence of the symptoms of the Dutch disease, the results indicate only on one symptom. Thus oil price shocks ultimately lead to appreciation of national currencies but not to a decline in tradable non-oil production.