Revisiting the impact of oil price shocks on macroeconomic performance: An international perspective

Abstract

The existing literature has mainly focused on the direct channel and adopted country-by-country analysis to investigate the oil impact on individual nations, ignoring or at least failing to specify the interplay across countries. Using a large-scale structural vector autoregression (SVAR) model that allows for an evolving parameter structure and that covers 60 oil-importing and -exporting economies, this paper disentangles the direct effect and indirect multiplier effect of oil price shocks on a specific economy. The results show that in addition to the well-documented direct effect, the indirect multiplier effect which works through the international transmission mechanism plays a crucial role in explaining total macroeconomic impacts of oil price swings. This paper also assesses the microstructure of indirect multiplier effect and investigates how it has evolved over the past 30 years. The findings of this paper provide a novel perspective to explain the “curse of natural resources”.