The Asymmetric Effects of Oil Price Shocks on Aggregate Demand for Goods and Services in Ghana

Abstract

Procyclicality has been discovered in crude oil price shocks on aggregate demand. Most studies have used linear estimation techniques, resulting in the loss of asymmetric correlations. We disaggregate the impact of changes in oil prices into positive and negative shocks on aggregate demand and its components from 1970 to 2015 using the nonlinear ARDL framework. The results show that oil price shocks in Ghana have a long-term beneficial asymmetric impact on aggregate demand and its components. Specifically, a positive change in oil price (0.230) has a greater positive effect on the aggregate demand than a negative effect (-0.009) emanating from a negative change in the oil price shock. Further, the same result was obtained for the components of the aggregate demand with the impact on investment expenditures (0.662) being the greatest. Policymakers should diversify energy demand according to our recommendations. Instead of exporting crude oil, officials should encourage its refinement and consumption. Lastly, we suggest that policymakers hedge and use price-smoothing strategies to reduce oil price volatility.