The macroeconomic effects of oil price shocks on ASEAN-5 economies

ASEAN-5’s continued economic growth with high oil and trade intensities means it is a fast growing region with a significant presence in the global energy market. This paper identifies three main drivers of oil price shocks - oil-supply, globalactivity and oil-specific demand shocks for the period 2000-2013. Subsequently, it assesses the effects of the identified oil shocks on the ASEAN-5’s macroeconomic variables and examines the responses of monetary policy. Since the recent shocks are largely demand driven, the impulse responses and historical decomposition for the ASEAN-5 highlight that the effects on inflation are accentuated while the effects on economic growth are less disruptive. The exchange rate responses are mostly positive while the effects on trade are positive for Malaysia, a net oil exporter and are moderately negative for the oil importers. Consequently the ASEAN-5’s central banks could tighten their monetary policy in response to higher inflation without fear of weakening their economies. The empirical results highlight that for monetary policy responses to be more supportive of growth, policy makers in these economies should examine the underlying causes of the future oil shocks.