Sources of Macroeconomic Fluctuations in MENA Countries

Balcilar, Mehmet and Bagzibagli, Kemal (2010): Sources of Macroeconomic Fluctuations in MENA Countries.

Abstract

A close examination of the MENA region economies reveals a number of fundamental sources of macroeconomic fluctuations. These include economic factors such as exchange rate instability, large public debt, current account deficits, and escalation of inflation. The political factors such as government instability, corruption, bureaucracy, and internal conflicts also are major sources of macroeconomic instability. Thus, the sources of macroeconomic fluctuations in these countries are expected to be inhomogeneous. This paper determines sources of macroeconomic fluctuations for 16 MENA economies using a structural VAR model. By imposing long-run restrictions on a VAR model, we identify four structural shocks: nominal demand, relative demand, supply, the world output, and imported input price shocks. Overall, the results show some similarities for the source of macroeconomic fluctuations in these, but also some important differences as well. We find important differences even among countries with similar macroeconomic conditions, such as the oil exporters and oil importers. Although, oil prices and world output are significant sources of macroeconomic fluctuations in oil exporters, in almost all countries they do not have the highest share. There is one clear common finding of the paper: For all countries, the long-run sources of output fluctuations are the real supply and/or real demand shocks. External shocks are secondary for all countries. The sources of short-run and price fluctuations are inhomogeneous and dominant variables are mostly determined by country specific factors.

• Item Type: MPRA Paper
• Language: English
• Keywords: MENA, business cycle, Structural VAR, small open economy macroeconomic model
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Abed, G.T., Davoodi, H.R., 2003, Challenges of Growth and Globalization in the Middle East and North Africa. Washington, DC: International Monetary Fund.

Agénor, P., McDermott, C.J., and Prasad, E., 1998. Macroeconomic Fluctiuations in Developing Countries: Some Stylized Facts, World Bank WDI Discussion Papers no. 19675.

Ahmed, S., Ickes, B., Wang, P., Yoo, B.S., 1993. International business cycles. American Economic Review 83, 335–359.

Ahmed, S., Park, J.H., 1994. Sources of Macroeconomic Fluctuations in Small Open Economies. Journal of Macroeconomics 16, 1-36.

Ahmed, S., Loungani, P.N., 1998, Business Cycles in Asia. Working Paper, Board of Governors of the Federal Reserve System, June.

Al Zoubi, H.A., Maghyereh, A., 2005, Examining Complex Unit Roots in the MENA Countries Industrial Production Indices, Applied Economics Letters 12, 255–259.

Andrews, D. W., 1993. Tests for Parameter Instability and Structural Change with Unknown Change Point. Econometrica 61, 821-56.

Bjørnland, H.C., 1998. Economic fluctuations in a small open economy: real versus nominal shocks. Statistics Norway Discussion Papers, vol. 215.

Blanchard, O.J., Quah, D., 1989. The dynamic effects of aggregate demand and supply disturbances. American Economic Review 79, 655–673.

Diboglu, S., Alesia, E., 2004. Oil prices, terms of trade shocks, and macroeconomic fluctuations in Saudi Arabia. Contemporary Economic Policy 22, 50-62.

Domaç, I., Shabsigh, G., 2001, Real Exchange Rate Behavior and Economic Growth in the Arab Republic of Egypt, Jordan, Morocco, and Tunisia. In Macroeconomic Issues and Policies in the Middle East and North Africa, ed. Z. Iqbal, pp. 190–212. Washington, DC: International Monetary Fund.

Doornik, J. A. and Hansen, H., 1994. A practical test of multivariate normality. unpublished paper, Nuffield College.

Hakura, D.S., 2004, Growth in the Middle East and North Africa. International Monetary Fund Working Paper 04, no. 56, Washington, DC.

Hall, P., (1992). The Bootstrap and Edgeworth Expansion, Springer, New York.

Hamilton, J.D., 1994. Time Series Analysis. Princeton, New Jersey.

Hirata, H.; Kim, S.H., Kose, M.A., 2004, Integration and Fluctuations: The Case of MENA. Emerging Markets Finance and Trade 40, 48–67.

Hirata, H.; Kim, S.H., Kose, M.A., 2007, Sources of Fluctuations: The Case of MENA? Emerging Markets Finance and Trade 43, 5–34.

Hoffmaister, A.W., Roldos, J.E., 1997. Are Business Cycles Different in Asia and Latin America. IMFWorking Paper, vol. 97/9.

Hoffmaister, A.W., Roldós, J.E., 2001. The Source of Macroeconomic Fluctuation in Developing Country: Brazil and Korea. Journal of Macroeconomics 23, 213-39.

Kydland, F.E., Prescott, E.C, 1982, Time to Build and Aggregate Fluctuations, Econometrica 50, 1345-70.

Iqbal, Z., ed., 2001, Macroeconomic Issues and Policies in the Middle East and North Africa. Washington, DC: International Monetary Fund.

Jalali-Naini, A.R., 2000, The Structure and Volatility of Fiscal Revenue in MENA Countries. Paper presented at the Third Mediterranean Development Forum, Cairo, March 5–7.

Lastraps,W.D., 1992. Sourse of fluctuations in real and nominal exchange rate. Review of Economics and Statistics 20, 530–539.

Long, J.B., Plosser, C.I., 1983, Real Business Cycles, Journal of Political Economy 75, 321-34.

Lucke, B., 2004, Real Interest Rates and Productivity Shocks: Why Are Business Cycles Negatively Correlated Between the European Union and Jordan? Emerging Markets Finance and Trade 40, 82–94.

Makdisi, S., Fattah, Z., Limam, I., 2003, Determinants of Growth in the MENA Countries. Arab Planning Institute Working Paper 0301.

Mehrara, M., Oskoui, K.N., 2007, The Sources of Macroeconomic Fluctuations in Oil Exporting Countries: A Comparative Study, Economic Modelling 24, 365–79.

Nashashibi, K.; Elhage, M., Fedelino, A., 2001, Financial Liberalization in Arab Countries. In Macroeconomic Issues and Policies in the Middle East and North Africa, ed. Z. Iqbal, pp. 62–88. Washington, DC: International Monetary Fund.

Parente, Stephen L., and Prescott, E.C., 1994. Barriers to Technology Adoption and Development. Journal of Political Economy 102, 298-321.

Prescott, E.C., 1986, Theory Ahead of Business Cycle Measurement, Carnegie-Rochester Conference Series on Public Policy 25, 11-44.

Sayan, S., 2004, Guest Workers’ Remittances and Output Fluctuations in Host and Home Countries: The Case of Remittances from Turkish Workers. Emerging Markets Finance and Trade 40, 68–81.

Shafik, N., ed., 1998, Prospects for Middle Eastern and North African Economies: From Boom to Bust and Back? New York: St. Martin’s Press.

Süssmuth, B., Woitek, U., 2004, “Business Cycles and Comovement in Mediterranean Economies.” Emerging Markets Finance and Trade 40, 7–27.

Tamberi, M., 2005, Specialization and Growth Perspectives in the Mediterranean Countries. Paper presented at the Middle East and North African Economies Past Perspectives and Future Challenges international conference, Free University of Brussels, June, 2–23.