Macroeconomic effects of world oil and food price shocks in Asia and Pacific economies: application of SVAR models

• Date: 01 September 2013
• Author: Fardous Alom,Baiding Hu,Bert D. Ward
• Published date: 01 September 2013
• DOI: http://doi.org/10.1111/opec.12015

Macroeconomic effects of world oil and

food price shocks in Asia and Pacific

economies: application of SVAR models

Fardous Alom,* Bert D. Ward** and Baiding Hu***

*Assistant Professor, Department of Economics, International Islamic University Malaysia, PO Box 10,

50728 Kuala Lumpur, Malaysia. Email: fardousalom@gmail.com

**Adjunct faculty member, Department of Accounting, Economics and Finance, Lincoln University, PO

Box 84, Christchurch 7647, New Zealand

***Senior Lecturer, Department of Accounting, Economics and Finance, Lincoln University, PO Box 84,

Christchurch 7647, New Zealand

Abstract

This study,by employing structural vector auto regression models, investigates the macroeconomic

effects of world oil and food price shocks in the context of selected Asia and Pacific countries.The

study reveals that the economic activities of resource-poor countries that specialise in heavymanu-

facturing industries, like Korea and Taiwan, are highly affected by world oil price shocks. On the

other hand, the economic activities of oil-poor nations such as Australia and New Zealand, with

diverse mineral resources other than oil, are not affectedby oil price shocks. Further more, countries

that are oil poor but specialise in international financial services, such as Singapore and Hong Kong,

are also not affected by oil price increases. Moreover, some developing countries, in this case, India,

with limited reserves of oil are not affected by oil price shocks, whereas other such countries, like

Thailand, possessing a number of natural resources other than oil are more strongly affectedby oil

price shocks. With regard to food price shocks, limited impacts from food price increases can be

recorded for India, Korea and Thailand. Overall, the effectsof exter nal oil and food prices depend on

the economic characteristics of the countries.

1. Introduction

Skyrocketing commodity prices create tensions in most countries (Blein and Longo,

2009), regardless of their developmentstatus. This seems to be particularly so for world oil

price (CP) and food price (FP) increases. Because of their status as necessary commodities

having relatively inelastic demand, these two commodities are matters of concern world-

wide. The CP shocks that began in the 1970s attracted the attention of many researchers,

and CP shocks have been regarded as one of the many reasons for global economic slow-

downs, especially for oil importing countries (Hamilton, 1983, 1996, 2003). High FP

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during the 1970s also created huge crises worldwide leading to a famine in 1973–1974.

Recent increases in both CP and FP have renewed the interests of all concerned, and it is

now generally agreed that increases in CP promote declining economic activities in the

oil-importing countries. It is also believed that increasing CP causes FP to increase, with

the joint hike of these two prices further worsening the situation (Alghalith, 2010). Oil is

an engine for economic activities, and so increases in CP havedirect impacts on many eco-

nomic activities, whereas food is not a direct input for any production. However, an

increase in FP may also pose negative impacts on the economic activities of both food

importers and exporters (WB, 2011b) increasing import bills for importers (ODI, 2008),

creating pressure on wages and reducing the food export demand for food exporters.

Although many studies document the impacts of CP on economic activities in developed

countries and,par tially, in countries outside the United States and Western Europe, there is

a dearth of studies available in the context of the impacts of FP.

The aim set out in the current study is to examine the impacts of CP and FP on indus-

trial production, inflation, real effective exchange rates (REER), interest rates and stock

prices forAustralia, New Zealand, South Korea, Singapore, Hong Kong,Taiwan, India and

Thailand. The choice of the study area is rationalised in terms of the lack of studies in the

Asia-Pacific region. A very few studies are available that address the impacts of CP in

these countries, and no studies are available on the effectsof FP; hence, the cur rent study

sheds light on the impacts of CP and FP on these countries, and identifies similarities and

disparities among them in terms of the effects.

The remaining part of the paper is organised as follows. Section 2 discusses and sum-

marises existing literature; Section 3 provides an overview of the theoretical channels of

CP and FP shocks on the economic variables; Section 4 introduces data and their sources;

methods used in the analysis of data are presented in Section 5, whereas Section 6 reports

empirical results; Section 7 discusses the findings with possible policy implications; and

Section 8 draws relevantconclusions from the study.

2. Literature review

A strand of literature is availabledealing with CP-macroeconomic relationships, although

few studies focus on possible FP-macroeconomic relationships. This section briefly dis-

cusses available literature on the impacts of CP and FP shocks related to this study. The

survey is limited to the net oil importer countries’ perspective and starts with CP and then

considers the impacts of FP.

Broadly speaking there are two categories of studies on the impacts of CP shocks on

economic activities such as economic growth and inflation in the case of the United States

or Western Europe: studies that document evidence of negative impacts of CP shocks and

those which report little or no evidence of impacts of the shocks.

Fardous Alom, Bert D. Ward and Baiding Hu328

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The first group starts with the pioneering work of Hamilton (1983). Using Sims’

(1980) vector autoregression (VAR) approach to the US data for the period 1948–1980,

the author shows that CP and the United States’ gross national product growth exhibit a

strong correlation. The author also reports that CP increased sharply prior to every reces-

sion in the US after World WarII. Following Hamilton, a number of studies document the

adverse impacts CP had on the gross domestic product (GDP) of the United States (Gisser

and Goodwin, 1986; Mork, 1989; Lee et al., 1995; Hamilton, 1996, 2003; Bjornland,

2000; Cunˇado and Gracia, 2003). Negative impacts of CP shocks are reported under dif-

ferent market structures as well (Rotemberg and Woodford, 1996; Finn, 2000). Some

studies focus on the factor market and industry levels, recording adverse impacts of CP on

employment, real wagesand industry outputs (Keane and Prasad, 1996; Davis et al., 1997;

Davis and Haltiwanger, 2001; Lee and Ni, 2002; Francesco, 2009; Lippi and Nobili,

2009). A number of studies deal with the magnitude and strength of the impacts of CP

shocks and reach a consensus that the impacts of earlier shocks, in the 1970s, are more

severe than the latest shocks, of the 1980s or 1990s (Burbidge and Harrison, 1984; Bohi,

1991; Raymond and Rich, 1997; Blanchard and Gali, 2007). Studies outside the United

States and Western Europe also report negative impacts of CP shocks (Huang et al., 2005;

Zhang and Reed, 2008; Cologni and Manera, 2009; Lescaroux and Mignon, 2009; Tang

et al., 2010).

Other studies focus on the relationship between CP and exchange rates, some report-

ing evidence of Granger causality (GC) from CP to exchange rates (Amano and van

Norden, 1998; Akram, 2004; Benassy-Quere et al., 2005; Lizardo and Mollick, 2010).Yet

others report that exchange rates influence CP (Brown and Phillips, 1986; Cooper, 1994;

Yousefi and Wirjanto, 2004; Zhang et al., 2008), whereas a fewstudies show that CP does

not have any relationship with exchange rates (Aleisa and Dibooglu, 2002; Breitenfeller

and Cuaresma, 2008).

There are also discussions on the association between CP and stock prices. Jones and

Kaul (1996) for the United States and Canada; Papapetrou (2001) for Greece; Sadorsky

(1999, 2003) for the United States; Basher and Sadorsky (2006) for some emerging

markets; and Park and Ratti (2008) for the United States and 13 European countries,

reporting that CP negatively affect stock prices. However, a few studies find little or no

relationship between oil and stock prices (Huang et al., 1996; Chen et al., 2007; Cong

et al., 2008; Apergis and Miller, 2009).

The second group of studies that find no or weak evidence of the impacts of CP shocks

on economic activities include Hooker (1996) and Segal (2007).

So far, different dimensions of CP shocks have been discussed in light of the litera-

ture available since 1983 to earliest 2010. The survey of literature has shown the causes

of CP shocks, along with consequences to economic activities: mainly adverse effects

with minor exceptions. Research is ongoing to find even more compact conclusions

Macroeconomic effects of world oil and food price shocks 329

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