A Survey of the Asymmetric Effects of Oil Price Shocks and Real Exchange Rate Fluctuation on Economic Growth and Inflation in Selected Countries of the Islamic Conference: EGARCH Approach

Document Type : Original Article

Authors

• sarvoddin fathi ¹
• masod nonegad ²
• hashem zare ³
• ali haghighat ³

¹ Ph. D in Economics, Department of Economic, Faculty of Economic and Management, Shiraz Branch, Islamic Azad University

² Assistant Professor, Department of Economic, Faculty of Economic and Management, Shiraz Branch, Islamic Azad University,

³ Assistant Professor, Department of Economic, Faculty of Economic and Management, Shiraz Branch, Islamic Azad University

https://doi.org/10.22067/erd.2023.72209.1066

Abstract

1- INTRODUCTION
The selected member countries of the Islamic Conference, including Iran, with different cultural, social, economic and environmental structures, have high degrees of instability in economic variables. Economic growth and inflation in the economy of these countries, compared to the economy of advanced countries, are more exposed to fluctuations. Experimental studies conducted in many of these countries show that there is a strong relationship between the real exchange rate and oil shocks and the performance of indicators such as inflation and economic growth. It has been developed and is being developed to examine the effects of oil shocks on the macroeconomic structure.
In fact, with the occurrence of positive oil shocks in the 1970s and the subsequent occurrence of the global economic recession, the attention of many researchers was directed to the study of the effects of oil shocks on the macroeconomic structure. On the other hand, the fluctuations caused by the real exchange rate due to creating uncertainty among the economic agents affects their future decisions to make investments (domestic and foreign). Since the investment is part of the demand of the entire economy and any disruption in it leads to disruption in production, therefore any change and fluctuation in the real exchange rate will also affect the economic variables.
 
2- THEORETICAL FRAMEWORK
Effects of independent variables on economic growth in oil exporting countries
Oil price shock: A decrease in the price of oil will reduce the government's oil revenues in oil exporting countries. Since the current expenses are sticky towards the bottom and it is not possible to reduce it easily when the oil revenues decrease, the decrease in oil revenues causes a decrease in infrastructure investments, which in turn decreases the production of the society.
 
Fluctuation of the real exchange rate: Fluctuation of the real exchange rate is due to the increase in the costs of producers due to the increase in the price of raw materials, intermediate goods and imported capital, which can lead to the weakening of domestic production and the reduction of economic growth.
Effects of independent variables on inflation in oil exporting
Oil price shock: An increase in oil prices will probably decrease the total supply. Because with the increase in the price of energy, companies buy less energy, so that the productivity of labor and capital, followed by potential production, decreases and the level of prices increases.
Volatility of real exchange rate: Increase in exchange rate fluctuations and uncertainty in it causes an increase the risk of international trade and increases the cost of trade, which causes a decrease in trade and a decrease in production and economic growth, and finally causes an increase in the price level.
Effects of independent variables on economic growth in oil importing countries
Oil price shock: An increase in oil prices by transferring income from importing countries to oil exporting countries causes a decrease in total demand and a slowdown in economic activities, resulting in a decrease in economic growth.
Fluctuations in the real exchange rate: With a decrease in the value of the currency, the price of imported goods increases. Now, if these imported goods are intermediate goods, the increase in their price leads to an increase in the production costs of goods that use these goods, which leads to a decrease in total production and economic growth.
Effects of independent variables on inflation in oil importing countries
Oil price shock: An increase in oil price leads to a decrease in disposable income in oil importing countries, and with an increase in production cost, it also reduces investment demand and increases the price level.
Volatility of the real exchange rate: An increase in the real exchange rate causes a decrease in the value of the national currency and an increase in the price of intermediate and capital imported goods, and causes an increase in production costs and, as a result, an increase in inflation.
 
3- METHODOLOGY
The current research is to investigate the effects of positive and negative oil price shocks, real exchange rate on economic growth and inflation in crude oil exporting and importing countries from two selected groups including twelve exporting countries (including Iran, Iraq, Saudi Arabia, United Arab Emirates, Algeria, Kuwait, Libya, Nigeria, Qatar, Ecuador, Angola, Venezuela) and twelve oil importing countries including (Malaysia, Egypt, Mali, Gabon, Tunisia, Togo, Sudan, Guinea, Indonesia, Pakistan, Bangladesh, Turkey) will use. A model that can take into account the asymmetric impact of shocks is called GARCH-exponential or EGARCH model, which was presented by Nelson (Nelson, 1991). The reason for inventing this model is that the ARCH model considers the effect of good and bad news equally, and on the other hand, all conditional variance coefficients must be positive. To achieve this goal, by adapting the study economic growth and inflation models are introduced as follows:
 
 [1]
 [2]
 
LVpoil (logarithm of positive oil price shock), LVnoil (logarithm of negative oil price shock), LInf (logarithm of inflation), LRER (logarithm of real exchange rate), LVRER (logarithm of volatility of real exchange rate), LK (logarithm of investment) LE, (logarithm of human capital) and coefficients β, γ, ψ, λ, δ reflecting short-term and long-term relationships between economic growth variables and inflation with It is explanatory variables. The coefficient ε is the error component and the index i represents the country and the index t represents the time.
 
4- RESULTS & DISCUSSION
Our results show that the research hypothesis that the reaction of economic growth and inflation to oil price shocks is asymmetric in both groups of oil exporting and importing countries. Also, the results of the tests and estimation of models show that real exchange rate volatility has a negative and positive effect on the economic growth and inflation of oil exporting countries and a positive effect on the economic growth and inflation of oil importing countries.
 
5- CONCLUSIONS & SUGGESTIONS
Policy recommendations
Oil exporting countries
1- Governments can disconnect their expenses from oil shocks by implementing stabilization mechanisms such as foreign exchange reserves.
Oil importing countries
1- Oil-importing countries, considering a strategic oil reserve, can use that strategic reserve at the time of a sudden increase in the price of oil and avoid the bad impact of the oil price shock on growth indicators.
 
Keywords: Oil Price Shocks, Real Exchange Rate Volatility, Economic Growth, EGARCH.

Keywords

• Oil Price Shocks
• Real Exchange Rate Volatility
• Economic Growth
• EGARCH

Main Subjects

• International Economics

References

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