The effects of external shocks on Azerbaijan economy

This paper examines the effects of external shocks on the economy of oil rich Azerbaijan. Using oil price and macroeconomic indicators of three major trade partners of Azerbaijan – EU, Russia, and Turkey - as the external shock variables, we analyze the effects of those shocks on the domestic macroeconomic variables of Azerbaijan during the period from 2000Q1 to 2017Q4, in the SVAR framework with block exogeneity restriction. The results show that the overall importance of the four groups of shocks, in descending terms, is in the following order: oil shock, EU origin shocks, Russia origin shocks, and Turkey origin shocks. The major findings of the paper are: a) among considered foreign shocks oil price shock is the most important foreign shock for the economy of Azerbaijan; b) in general EU origin shocks has larger impact on considered domestic variables compared to other trade partners origin shocks; c) Turkey origin shocks have almost no impact in any of the considered domestic variables of Azerbaijan, d) among considered external shocks oil price is the main determinant of the non-oil sector of economy, and e) among considered external shocks GDP growth of the trade partners is the main determinant of the inflation in Azerbaijan.