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Abstract
This study examines the impact of asymmetric oil price shocks on economic activity in selected 13 Asian economies, namely Bangladesh, China, Hong Kong, India, Indonesia, Japan, South Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka and Thailand by employing nonlinear autoregressive distributed lag approach over the period 1980Q1–2014Q2. Our results provide no evidence of a long-run relationship between positive and negative oil price changes and economic activity in Bangladesh, China, India, Pakistan, the Philippines, Singapore, Sri Lanka and Thailand. In the short run, real GDP responds symmetrically to positive and negative oil price changes in China, South Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka and Thailand, while it behaves asymmetrically to oil price shocks in Bangladesh, Hong Kong, India, Indonesia and Japan. However, no long-run asymmetry in oil price changes and economic activity was detected in all the countries. The impulse response analysis reveals that oil price shocks have limited asymmetric effects on GDP growth in Bangladesh, Indonesia, Japan, Malaysia, Pakistan and Singapore, while oil price shocks have symmetric impact on the GDP growth in India, South Korea, the Philippines, Sri Lanka and Thailand. It is also observed that the impact of oil price shocks is relatively higher in Bangladesh, China, Indonesia, Malaysia and Pakistan than Hong Kong, Japan, South Korea and Singapore. In case of India, the Philippines, Sri Lanka and Thailand, the impact of oil price shocks is similar to that of Hong Kong, Japan, South Korea and Singapore.
Oil price might affect the economy by supply-side channel (Rasche and Tatom 1977; Barro 1984); wealth transfer channel (Barsky and Kilian 2004); real balance channel (Brown and Yucel 2002); and monetary policy channel (Bernanke et al. 1997). For further detail, see Khan and Ahmed (2014).
The share of Asia in world oil consumption was increased from 27.47% in 2001 to 34.15% in 2015. Similarly, oil imports of Asian countries increased from 3914 thousand barrels daily in 2001 to 7006 thousand barrels daily in 2015, registering 79% increase (BP Statistical Review of World Energy 2016).
Economic and financial shocks (e.g. 1997–1998 Asian financial crisis, the
2001 dot com bubble burst, the 2007
subprime crisis in the USA and global
financial crisis of 2008–2009), wars
(e.g. the 11 September 2001 terrorist
attack, the Gulf wars in 1991 and
2003 and the Arab Spring since 2010) may cause unexpected changes in the behavior of economic and
financial time series, which induce
structural breaks and
nonlinearities in the oil price economic
growth relationship (Atil
et al. 2014).
Hamilton (2009) reported that big increases in the oil prices were associated with events such as the 1973–1974 embargo by the Organization of Arab Petroleum Exporting Countries, the Iranian Revolution of 1978, the Iran–Iraq War in 1980 and the first Persian Gulf War in 1990 and each of these event was followed by global economic recessions.
Reallocation happens when labour and capital are sector specific and cannot be moved from one sector to another within the same industry. Such nonlinearities frequently happen in the oil price–output relationship.
The NARDL has gained popularity in recent years in capturing the asymmetric impact in a diverse field. For example, Atil et al. (2014) used NARDL to study asymmetric response of gasoline and natural gas prices in the USA to variations in crude oil prices. Nusair (2016) investigated the impact of asymmetric oil price shocks on the real GDP in GCC countries.
We estimate ECM for countries where cointegration relationship is found and test for Granger causality to determine the direction of causality among the variables.
It is well established that fall in the oil prices leads to low transport and other business costs. Lower oil prices can reduce cost of living, lower inflation, increase aggregate expenditure on goods and services and add to real GDP. On the other hand, when higher oil prices stimulate real GDP, it implies that oil is complementary for economic growth.
The government in these countries insulates consumers by offering subsidy on oil which increases fiscal deficit. It is argued that subsidy will not benefit consumers as the saving from households would not be drained out due to extra tax burden (Pal and Mitra 2016).
Huntington (1998) argued that oil prices are essential energy prices that are transmitted to the economy through changes in refined petroleum products.
For instance, World Energy Outlook (2015) reported that pre-tax fuel subsidy in Bangladesh was 1.7% of GDP, China (0.2% of GDP), India (1.9% of GDP), Indonesia (3.1% of the GDP), Malaysia (1.6% of GDP), Pakistan (2.7% of GDP), Philippines (0.2% of GDP), Sri Lanka (0.5% of GDP) and Thailand (0.6% of GDP) in 2011.
The reason for limited impact of oil price shocks on Japanese economy is that Japan has made significant efforts to diversify energy resources by building more renewable energy power plants. Oil-based new power plants in Japan are banned, particularly after the Fukushima nuclear disaster. In addition, as younger population resides densely in metropolitan areas, the demand for oil is decreasing. Hence, on average crude oil import in Japan has been on a decreasing trend since 1996 (Cunado et al. 2015).
Subsidy is considered as an opportunity cost because the government sells oil in the domestic market below the world price. For net oil exporters, energy subsidies are a mechanism to redistribute wealth from natural resources. It helps the poor and promotes economic growth. However, for net oil importers, it has direct fiscal costs. For instance, it fosters energy-intensive growth and discourages the expansion of labour-intensive industries. Energy subsidy has high opportunity costs such as foregone investment in infrastructure, health and schooling, increases budget deficit, creates crowding-out in domestic capital market and acts as hidden tax on economic development.