Dynamic Association among Economic Growth, Oil Prices, and Key Macroeconomic Factors: Evidence from the US and Korea

Abstract

Purpose - This study aims to investigate how economic growth responds to oil price volatility and key macroeconomic factors, such as interest rate, inflation and unemployment rate in two big oil consumers and importers in the world, the US and Korea. Design/Methodology/Approach - This study used quarterly time-series data of each variable for the period 1990 to 2022, consisting of two sub-periods, to employ ARDL (autoregressive distributed lag) method and the Granger causality test in order to identify the role of the movement of oil prices and key macroeconomic factors in national economic growth in the US and Korea. Findings - The results show that economic growth is correlated with interest rate, CPI, and unemployment rate in the US and Korea, with no significant relationship between economic growth and crude oil price shocks for both the pre- and post-GFC periods in the two countries. For the long-run and short-run effects among variables based upon the ARDL model estimation, there exists a long-run impact of past CPI value on the Korea’s economic growth in the pre-GFC period and, in the post-GFC, various variables affect economic growth in the US and Korea. In the short run, there is no evidence of an oil price shock effect on national economic growth in the US and Korea. Research Implications - The findings confirmed that the impact of oil price shocks on the national economic performance has weakened. This study has significant implications for policymakers attempting to address the effects of oil price shocks in their economies. Policymakers need to focus on the relatively manageable economic variables for sustainable economic growth rather than oil price changes. It is also suggested that oil price as a production cost and policy-manageable macroeconomic variables that have been used as growth strategies have limitations in using them any longer because the expansion of potential growth through reform or innovation is believed to be the source of economic growth.