Revisiting the Dynamic Effects of Oil Price Shock on Small Developing Economies

This paper examines the dynamic effects of oil price shocks in addition to the aggregate supply and demand shocks on macroeconomic fluctuations in four sample economies: Indonesia, Malaysia, Pakistan and Thailand. We aim to discover whether oil price shocks play a crucial role in explaining output and domestic price fluctuation in small emerging economies after 1990's. We are also keen to assess whether oil price shocks have different effects on macroeconomic variations in oil importing (Pakistan and Thailand) and oil exporting (Indonesia and Malaysia) countries. A structural VAR is applied to identify different structural shocks and further explore the relative contributions of different shocks on macroeconomic fluctuation. Our results show that oil price shocks have negligible positive effects on output in one oil exporting country (Malaysia) but also in two oil importing countries (Pakistan and Thailand). However, it is less likely that oil price shocks have a substantial impact on macroeconomic fluctuation. The aggregate supply and demand shocks are the main sources of fluctuation in output and domestic price respectively in Malaysia, Pakistan and Thailand. In Indonesia, aggregate supply shocks are the key reason for both output fluctuation and inflation.