The Macroeconomic Effects of Oil Price Fluctuations in ASEAN Countries: Analysis Using a VAR with Block Exogeneity

We use a VAR with block exogeneity to study the effects of oil price fluctuations on the economies of six ASEAN countries. Our method has an advantage over those used in the literature in that it allows us to focus on the effects of oil shocks while avoiding making unnecessary, and often ad hoc and unrealistic, assumptions about the structure of the economies under question. We decompose the factors that drive oil prices into oil supply shocks, oil demand shocks coming from the global real economic activity and oil-market specific demand shocks. We find that, in terms of output and price variabilities, the oil importing countries such as Singapore, Thailand and the Philippines are more sensitive to the situation in the world oil market than the oil exporting countries such as Indonesia, Malaysia. We find evidence that the monetary authorities of ASEAN countries have responded to changes in oil prices due to oil-market specific demand shocks. We also find that much of the surge in world market oil prices in 2007-2008 was mainly due to global aggregate demand shocks and oil-market specific shocks, and by working through oil prices these shocks were important factors that caused the high inflation in ASEAN countries in the first half of 2008.