Oil price volatility, fiscal policy and economic growth: a panel vector autoregressive (PVAR) analysis of some selected oil‐exporting African countries

• Author: Festus O. Egwaikhide,Joseph Ayoola Omojolaibi
• Date: 01 June 2014
• DOI: http://doi.org/10.1111/opec.12018
• Published date: 01 June 2014

Oil price volatility, fiscal policy and

economic growth: a panel vector

autoregressive (PVAR) analysis of some

selected oil-exporting African countries

Joseph Ayoola Omojolaibi* and Festus O. Egwaikhide**

*Lecturer, Department of Economics, College of Social and Management Sciences, Caleb University,

Lagos, Nigeria. Email: omojo_laibi@yahoo.com

**Professor, Department of Economics, Faculty of the Social Sciences, University of Ibadan, Ibadan,

Nigeria. Email: fegwas@yahoo.com

Abstract

Fiscal policy in oil-centred economies is facing specific challenges, both in the long run, as

regards intergenerational equity and fiscal sustainability, and in the short run, as regards macr-

oeconomic stabilisation and fiscal planning. Specifically, fiscal policy in most oil-exporting coun-

tries in Africa has been expansionary over the past years in the wake of high oil prices. Fiscal

expansion has added to inflationary pressure, and monetary policy has been constrained in tack-

ling inflation as a result of prevailing exchange rate regimes.The sharp f all in oil prices since mid-

2008 has brought to the fore a different question—whether oil exporters in Africa can sustain

spending levels reached in previous years. The study makes use of quarterly data that span

between 1990:q1 and 2010:q4. A panel vector autoregressivetechnique was employed to examine

the impact of oil price volatility on economic performance of five oil-exporting countries in

Africa. The countries are Algeria, Angola, Egypt, Libya and Nigeria. In order to study the

responses of shocks, the study identifies oil price volatility, real gross domestic product (real

GDP), fiscal deficit, gross investment and money supply shocks by ordering the variables in this

way and using a standard Choleski factorisation. The impulse response function’s result shows

that of all the macroeconomic variables considered, gross investment respond more effectively to

oil price volatility. However, the responses of fiscal deficit, real GDP and money supply are less

effective. Overall, these findings suggest that gross investment is the main route through which

volatility in oil price influenced the real sector of these economies.

1. Introduction

A detailed analysis of the effects of oil price volatility on fiscal policy and economic

growth in some selected oil-exporting countries in Africa is the focus of this study. The

purpose of fiscal policy is basically to stimulate economic and social development by

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pursuing a policy stance that ensures a sense of balance between taxation, expenditure

and borrowing that is consistent with sustainable growth. Nonetheless, the extents to

which oil price and fiscal policy engender economic growth continue to attract theoreti-

cal and empirical debate, especially in developing countries. In recent times, the debate

has been given more impetus in African countries; the basis of that agitation is due to

the argument that the seemingly steady growth that has been recorded over the past

decade has not provided a reasonable number of jobs. Furthermore, the sharp fall in oil

prices since mid-2008 has brought to the fore a different question—whether oil export-

ers in Africa can sustain spending levels reached in previous years.

However, most of the empirical studies carried out have focused on the oil-

importing economies, particularly developed economies. Few studies exist yet on the

effect of oil price volatility on key macroeconomic variables for oil-exporting countries.

Besides, some of the few available studies are country specific.1This study intends to fill

this gap by focusing on multi-country analysis. In the light of the debate, the study seeks

to enquire the effects of oil price volatility on fiscal policy and economic growth in oil-

exporting countries in Africa over the years and measure the transmission channels of

oil price volatility to each of the countries between the period 1990:q1 and 2010:q4. The

motivation for the paper is that debate on the efficacy of oil price in stimulating fiscal

policy and growth in Africa seems to have received scant attention. This study seeks to

contribute to the public discourse on the subject matter from a cross-country empirical

effort.

A panel vector autoregressive (PVAR) model of theAfrican economies is constructed

to test the effects of oil price volatility on economic activities of these countries and the

magnitude of the impacts. The advantages of the PVAR method are threefold. Firstly, it

provides a flexibleframework that combines the traditional VAR approach with panel data

and increases the efficiency and the power of analysis while capturing both temporal and

contemporaneous relationships among variables (Mishkin and Schmidt-Hebbel, 2007).

Secondly, the technique can take into account complex relationships and identifies

dynamic responses of variables followingexogenous shocks using both impulse response

functions and variance decompositions. In that way, it provides a systematic way of cap-

turing the rich dynamic structures and comovements between different variables over

time.This allows clear examination of the economy’s response to oil price shocks. Thirdly,

it addresses the endogeneity problem by allowing for endogenous interactions and feed-

back effects between variablesin the system.

The rest of the article is organised into five sections. Section 2 presents the macroeco-

nomic performance in the selected oil-exporting countries. Contained in section 3 is the

related literature on the subject matter. The methodology, estimation techniques and data

sources are considered in section 4. The major findings and policy implications are

reported in section 5, while, section 6 concludes.

Joseph Ayoola Omojolaibi and Festus O. Egwaikhide128

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