Oil price shocks and macroeconomic policy in resource-rich emerging economies

Omotosho, Samson Babatunde (2021) Oil price shocks and macroeconomic policy in resource-rich emerging economies. PhD thesis, University of Glasgow.

Abstract

This thesis is a collection of three papers aimed at investigating the macroeconomic effects of oil price shocks on resource-rich economies as well as the appropriate policy responses for ameliorating such effects. The first paper begins by examining the implications of physical capital and oil intensity of domestic production for the response of a small open economy to an oil price shock. Building on the work by Ferrero and Seneca (JMCB 2019), we find that the introduction of physical capital amplifies the responses of output and inflation to oil price shocks whereas the effects are attenuated by the oil intensity in domestic production. Also, our results reveal that the added features are important for the response of monetary policy to an oil price shock. Under our model set up, the optimal monetary policy response requires that the central bank keeps an eye not only on output and inflation, but also the exchange rate. These results highlight the need for cautious interpretation of the quantitative impacts of an oil price shock generated based on New Keynesian models of oil producing economies that abstract from capital. Paper 2 studies the role of oil price shocks in driving business cycle fluctuations of an oil-producing emerging economy with an inefficient fuel subsidy regime. Results from our estimated DSGE model for the Nigerian economy show that output fluctuations are driven mainly by oil and monetary policy shocks in the short run. However, oil shocks play a less prominent role in driving inflation dynamics owing partly to the low pass-through effect of international oil price into domestic prices implied by the fuel subsidy regime. While we find the core inflation-based Taylor rule optimal, we demonstrate that the Central Bank of Nigeria (CBN) faces a dilemma of either stabilising output or inflation in the face of an adverse oil price shock. Simulation results show that an “across-the-board” monetary policy strategy does not exist for dealing with an oil price shock in the resource-rich economy; thus, it is important that the CBN is aware of the observed trade-offs. The last paper investigates monetary-fiscal interactions in a resource-rich emerging economy whose fiscal policy is largely driven by resource-related flows. To achieve this, we analyse Nigeria’s experience over the last two decades by developing and estimating a suitable DSGE model. Our results provide convincing evidence of an active monetary and passive fiscal policy over the full sample. Furthermore, we confirm the presence of revenue substitution; a phenomenon that alters the "automatic stabilisers" role of fiscal policy in the resource-rich economy. The 2008/09 global financial crisis did not significantly alter these findings. However, our results are sensitive to (i) the response of fiscal policy to resource-related flows and (ii) the response of monetary policy to exchange rate.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Keywords: Oil price shocks, monetary policy, resource-rich economies, DSGE.
• Subjects: H Social Sciences > HB Economic Theory
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
• Supervisor's Name: Dennis, Professor Richard and Nolan, Professor Charles
• Date of Award: 2021
• Depositing User: Mr Babatunde S. Omotosho
• Unique ID: glathesis:2021-81953
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 29 Jan 2021 09:59
• Last Modified: 16 Feb 2021 08:24
• Thesis DOI: 10.5525/gla.thesis.81953
• URI: https://theses.gla.ac.uk/id/eprint/81953