The macroeconomic effects of oil price and risk-premium shocks on Vietnam: Evidence from an over-identifying SVAR analysis

Pham, Thai-Binh and Sala, Hector (2019): The macroeconomic effects of oil price and risk-premium shocks on Vietnam: Evidence from an over-identifying SVAR analysis.

Abstract

This paper studies the macroeconomic effects of oil price shocks in Vietnam. It expands Kilian’s (2009) framework to simultaneously consider risk-premium shocks and comprehensively assess their consequences on international competitiveness and the State Bank management of the monetary policy. Methodologically, this implies dealing with an over-identified structural vector autoregression (SVAR) model. Data wise, the analysis is performed on a unique dataset with variables defined at a monthly frequency running from 1998:01 to 2018:12. Demand-side, global-, and specific-oil price shocks determine inflation and international competitiveness, and play an essential role in explaining the long-run variations of several Vietnamese macroeconomic indicators (mainly the trade balance, three-month interest rates, and the inflation rate). Vietnam’s Dong pegging to the US Dollar results in a stronger impact of these shocks when real exchange rates and the rate of exports are modelled, than when real effective exchange rates and the trade balance are modelled. In the latter case, shock absorption is quicker given the multilateral trade context in which no single pegging holds. In association to the strong tie between Vietnam’s Dong and the U.S. dollar, we also uncover remarkable effects of risk-premium (or U.S. Federal Fund rate) shocks. Supply-side oil price shocks have little impact on inflation and international competitiveness but condition the monetary policy. Neglecting such influence in the past may have resulted in an excessively conservative monetary policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Oil price shocks; risk-premium shocks; SVAR; international trade; Vietnam
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F6 - Economic Impacts of Globalization > F62 - Macroeconomic Impacts; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q41 - Demand and Supply ; Prices; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q43 - Energy and the Macroeconomy

References

Ahmed, H.J.A., Wadud, I.K.M.M., 2011. Role of oil price shocks on macroeconomic activities: An SVAR approach to the Malaysian economy and monetary responses. Energy Policy 39, 8062–8069.

Amisano, G. and Giannini, C., 1997. Topics in structural VAR econometrics. Springer.

An, L., Jin, X., Ren, X., 2014. Are the macroeconomic effects of oil price shock symmetric?: A Factor-Augmented Vector Autoregressive approach. Energy Economics 45, 217–228.

Anwar, S., Nguyen, L.P., 2018. Channels of monetary policy transmission in Vietnam. Journal of Policy Modeling 40, 709–729.

Basnet, H.C., Upadhyaya, K.P., 2015. Impact of oil price shocks on output, inflation and the real exchange rate: evidence from selected ASEAN countries. Applied Economics 47, 3078–3091.

Baumeister, C., Kilian, L., 2014. Do oil price increases cause higher food prices? Economic Policy 29, 691–747.

Bhattacharya, R., 2014. Inflation dynamics and monetary policy transmission in Vietnam and emerging Asia’, Journal of Asian Economics, 34, pp. 16–26.

Bohi, D.R., 1991. On the macroeconomic effects of energy price shocks. Resources and Energy 13, 145–162.

Castelnuovo, E. and Surico, P., 2006. The Price Puzzle: Fact or Artefact? Bank of England Working Paper. No. 288.

Cavalcanti, T., Jalles, J.T., 2013. Macroeconomic effects of oil price shocks in Brazil and in the United States. Applied Energy 104, 475–486.

Choi, S., Furceri, D., Loungani, D., Mishra, S., and Poplawski-Ribeiro, M. 2018. “Oil Prices and Inflation Dynamics: Evidence from Advanced and Developing Economies.” Journal of International Money and Finance 82: 71–96.

Considine, T.J., 1988. Oil price volatility and U.S. macroeconomic performance. Contemporary Economic Policy 6, 83–96.

Cunado, J., Jo, S., de Gracia, F.P., 2015. Macroeconomic impacts of oil price shocks in Asian economies. Energy Policy 86, 867–879.

Elgammal, M.M., Eissa, M.A., 2016. Key determinants of inflation and monetary policy in the emerging markets: Evidence from Vietnam. Afro-Asian Journal of Finance and Accounting 6, 210–223.

Faria, J.R., Mollick, A.V., Albuquerque, P.H., León-Ledesma, M.A., 2009. The effect of oil price on China’s exports. China Economic Review 20, 793–805.

Fukunaga, I., Hirakata, N., Sudo, N., 2011. The Effects of Oil Price Changes on the Industry-Level Production and Prices in the United States and Japan, in: Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20, University of Chicago Press. pp. 195–231.

Hamilton, J. D., 1983. Oil and the macroeconomy since World War II, Journal of Political Economy, 91(2), pp. 228–248.

Hamilton, J. D., 2003. What is an oil shock?, Journal of Econometrics, 113(2), pp. 363–398.

Holtemöller, O., Mallick, S., 2016. Global food prices and monetary policy in an emerging market economy: The case of India. Journal of Asian Economics 46, 56–70.

Inumula, K.M., Solanki, S., 2017. Exploring causal nexus between crude oil price and exchange rate for India. International Journal of Economic Research 14, 319–331.

Iwaisako, T., Nakata, H., 2017. Impact of exchange rate shocks on Japanese exports: Quantitative assessment using a structural VAR model. Journal of the Japanese and International Economies 46, 1–16.

Jiménez-Rodríguez, R., Sánchez, M., 2012. Oil price shocks and Japanese macroeconomic developments. Asian-Pacific Economic Literature 26, 69–83.

Katircioglu, S.T., Sertoglu, K., Candemir, M., Mercan, M., 2015. Oil price movements and macroeconomic performance: Evidence from twenty-six OECD countries. Renewable and Sustainable Energy Reviews 44, 257–270.

Kilian, L., 2009. Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review 99, 1053–1069.

Kilian, L., 2019. Measuring global real economic activity: Do recent critiques hold up to scrutiny?. Economics Letters, 178, pp. 106–110.

Kilian, L., Rebucci, A., Spatafora, N., 2009. Oil shocks and external balances. Journal of International Economics 77, 181–194.

Kim, W.J., Hammoudeh, S., Hyun, J.S., Gupta, R., 2017. Oil price shocks and China’s economy: Reactions of the monetary policy to oil price shocks. Energy Economics 62, 61–69.

Kisswani, K.M., 2015. Does oil price variability affect ASEAN exchange rates? Evidence from panel cointegration test. Applied Economics 48, 1–9.

Korhonen, I., Ledyaeva, S., 2010. Trade linkages and macroeconomic effects of the price of oil. Energy Economics 32, 848–856. Le, T.H., Chang, Y., 2013. Oil price shocks and trade imbalances. Energy Economics 36, 78–96.

Lee, B.R., Lee, K., Ratti, R.A., 2001. Monetary policy, oil price shocks, and the Japanese economy. Japan and the World Economy 13, 321–349.

Lee, C.C., Chiu, Y.B., 2011. Nuclear energy consumption, oil prices, and economic growth: Evidence from highly industrialized countries. Energy Economics 33, 236–248.

Lizardo, R.A., Mollick, A.V., 2010. Oil price fluctuations and U.S. dollar exchange rates. Energy Economics 32, 399–408.

Lorusso, M., Pieroni, L., 2018. Causes and consequences of oil price shocks on the UK economy. Economic Modelling 72, 223–236.

Narayan, S., 2013. Foreign exchange markets and oil prices in Asia. Journal of Asian Economics 28, 41–50. Osorio, C., Unsal, D.F., 2013. Inflation dynamics in Asia: Causes, changes, and spillovers from China. Journal of Asian Economics 24, 26–40.

Pham, B. T., Sala, H. and Silva, J. I., 2019. Growth and real business cycles in Vietnam and the ASEAN-5. Does the trend shock matter?. Economic Systems (manuscript accepted).

Rafiq, S., Sgro, P., Apergis, N., 2016. Asymmetric oil shocks and external balances of major oil exporting and importing countries. Energy Economics 56, 42–50.

Ratti, R.A., Vespignani, J.L., 2013. Why are crude oil prices high when global activity is weak?. Economics Letters 121, 133–136.

Salvatore, D., Winczewski, G., 1990. World oil prices and O.E.C.D. trade balance. Open Economies Review 1, 89–106.

Sultonov, M., 2017. The impacts of the oil price fall on the exchange rates of ASEAN-5: Evidence from the 2014 oil price shock. Economics Bulletin 37, 468–479.

Tatom, J.A., 1988. Macroeconomics effects of the 1986 oil price decline. Contemporary Economic Policy 6, 69–82.

Trang, N.T.N., Tho, T.N., Hong, D.T.T., 2017. The impact of oil price on the growth, inflation, unemployment and budget deficit of Vietnam. International Journal of Energy Economics and Policy 7, 42–49.

Ur-Rahman, M., Zoundi, Z., 2018. Macroeconomic response of disentangled oil price shocks: Empirical evidence from Japan. Economics Bulletin 38, 2240–2253.

Zhang, D., 2008. Oil shock and economic growth in Japan: A nonlinear approach. Energy Economics 30, 2374–2390.

Zhao, L., Zhang, X., Wang, S., Xu, S., 2016. The effects of oil price shocks on output and inflation in China. Energy Economics 53, 101–110.