How does purchasing power in OPEC countries respond to oil price periodic shocks? Fresh evidence from Quantile ARDL specification

• Published date: 01 December 2021
• Author: Philip Chimobi Omoke,Emmanuel Uche
• Date: 01 December 2021
• DOI: http://doi.org/10.1111/opec.12216

How does purchasing power in OPEC

countries respond to oil price periodic

shocks? Fresh evidence from Quantile ARDL

specification

Philip Chimobi Omoke* and Emmanuel Uche**

*Department of Economics and Development Studies, Alex Ekwueme Federal University, Ndifo Alike,

Ikwo, Ebonyi State, Nigeria.

**Department of Economics, Abia State University, Uturu, Abia State, Nigeria. Email:

uche.emmanuel@abiastateuniversity.edu.ng

Abstract

This study provides new insights on the dynamics of oil price shocks and purchasing power (PP) in

the top six OPEC economies using the Quantile ARDL modelling technique. Notably, previous

studies were largely silent about the impact of oil price periodic shocks on PP. To fill this gap, we

used quarterly data of oil prices and PP from 1990Q1 to 2019Q4 drawn from relevant data hosts.

Empirical evidence reveals that the effects of oil price shocks vary across the distributions of PP in

all the countries. Equally, there is evidence of long-run asymmetric pass-through from oil prices to

PP in Saudi Arabia, whereas, short-run asymmetric effects were recorded in Nigeria, and UAE.

Also, evidence indicates that PP in Saudi Arabia, Nigeria and Angola experience a sharp decline in

response to persistent oil price shocks. Additionally, PP in UAE and Algeria witnessed momentary

boosts only at quantiles above the mean; however, it fizzles out thereafter. In Kuwait, there is

evidence of short-run boost without corresponding long-run effects. The findings of this study have

important policy implications.

1. Introduction

Energy economics literature is replete with information on the overriding influence of oil

price on various macroeconomic aggregators (see, Hamilton, 2003, 2011; Valcarcel and

Wohar, 2013; Nazariam and Amiri, 2014; Gao et al., 2019; Omoke and Uche, 2020;

Uche and Nwamiri, 2020). However, economic researchers are divided in their opinions

about the relative impacts of oil price shocks on most macroeconomic aggregators. A

particular strand contends that the effects of oil price deviations on the economy depend

on whether such is oil net-exporter or net-importer (Gokmenoglu et al., 2015; Karimli

et al., 2016; Uche and Nwamiri, 2020). Another strand, attributable to Hamilton (2003),

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submits that economic downturns experienced in the USA since the 1970s were

occasioned by the surge in oil prices. Some divergent opinions report that oil price

deviations are not entirely responsible for the economic recession experiences of the

USA and some other nations (Kilian, 2014; Tiwari et al., 2019). However, amid the

dissenting voices, researchers are relatively in agreement that oil price shocks are partly

transmitted to purchasing power (PP; Edelstein and Kilian, 2009; Pal and Mitra, 2019).

Suffice it to say that the exact nature and the strength of the pass-through is still a subject

of debate.

The PP of a particular currency is the worth of that currency in terms of the volume

of goods and services that can be purchased by a unit of such currency. In other words, it

is the value of a currency expressed in terms of the number/value of goods or services

that a single unit of that currency can buy in comparison to other international currencies.

The literature identifies four channels through which oil price changes are transmitted to

the PP. These four channels include; first, the uncertainty effects (Bernanke, 1983;

Pindyck, 1991), whereby, the fluctuating energy prices create uncertainties about future

paths, and consumers would postpone purchases of other household consumables in

preference to energy-related goods. Second, the operating cost effect (Hamilton, 1988),

in this regard, the consumption of energy-absorptive consumables could be forego ne to

reduce operating costs. As such, energy-complimentary goods (for instance, automo-

biles, etc.) face highly elastic demand in direct response to marginal increases in gasoline

prices. The third channel is the discretionary income effects (Edelstein et al., 2009);

whereby, consumers are left with little funds after offsetting rising energy bills. The

fourth channel is the precautionary savings effect (Gokmenoglu et al., 2015). This

school of thought has it that consumers might cut down on their consumption and save

more in anticipation of future unemployment heralded by higher oil prices.

Additionally, based on in-depth reviews, Hamilton (2011) suggests that uncertainty

and reallocation effects of oil price fluctuations might result in asymmetric responses of

PP. Pal and Mitra (2019) further highlight that consumers tend to observe the trends of

oil prices before making decisions on the purchase of energy-absorptive consumables.

By so doing, it takes the economy a considerable length of time to recover and

withstands the negative effects of oil price shocks on the PP. More so, the economy is

subsequently repositioned to adequately contend with the effects of fluctuating oil prices

on macroeconomic indicators, including the PP of the currency.

Notably, the response of macroeconomic indicators to oil price variations is still a

contentious and debateable topic among energy scholars. Recent studies report

inconsistent findings of the effects of oil price shock on macroeconomic aggregates,

including the PP (Edelstein et al., 2009; Pal and Mitra, 2019), domestic prices (Castro

et al., 2016; Adebayo, 2020; Chen et al., 2020), the exchange rate (Abed et al., 2016;

Beckmann et al., 2020), stock prices (Du and He, 2015; Adekunle et al., 2020; Ahmed

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