Economic Effects of Oil and Food Price Shocks in Asia and Pacific Countries: An Application of SVAR Model

This study investigates the economic effects of external oil and food price shocks in thecontext of selected Asia and Pacific countries including Australia, New Zealand, SouthKorea, Singapore, Hong Kong, Taiwan, India and Thailand. The study is conducted withinthe framework of SVAR model using quarterly data over the period 1980 to 2010 althoughstart date varies based on availability of data. The study reveals that resource poor countriesthat specialize in heavy manufacturing industries like Korea and Taiwan are highly affectedby international oil price shocks. Oil price shocks negatively affect industrial output growthand exchange rate and positively affect inflation and interest rates. On the other hand, oilpoor nations such as Australia and New Zealand with diverse mineral resources other than oilare not affected by oil price shocks. Only exchange rates are affected by oil price shocks inthese countries. Furthermore, countries that are oil poor but specialized in internationalfinancial services are also not affected by oil price increase. Similarly, developing countryLike India with limited reserve of oil is not affected by oil price shock. However, Thailandpossessing a number of natural resources other than oil is not accommodative of oil priceshocks. Limited impact of food prices can be recorded for India, Korea and Thailand in termsof industrial output, inflation and interest rate. The major impact of food prices is that it helpsdepreciating real effective exchange rate for almost all countries except Singapore. As awhole, the effects of external oil and food prices depend on the economic characteristics ofthe countries. The empirical results of this study suggest that oil and food prices should beconsidered for policy and forecasting purposes especially for Korea, Taiwan and Thailand.