Are Long-Run Effects from Oil and Gas Disturbances Different? Insights for Trinidad and Tobago

This paper answers two primary questions on Trinidad and Tobago’s economy: (1) How long are the effects from oil and gas disturbances on the economy? (2) How do the long-run effects from oil and gas disturbances differ within the economy? Trinidad and Tobago was ideal for this investigation due to its well-developed gas and oil exploration infrastructure. To achieve this task an estimation of a VECM model, with cointegration restrictions based on a long-run macroeconomic model were conducted. Benchmark analysis was performed that compared VECM against traditional time series models showing the benefits of utilizing cointegration relationships that were embedded within the data. In addition to teasing out the long-run effects of oil and gas disturbances, a SVEC model was estimated. It was found that there was a clear distinction between oil and gas disturbances with oil shocks being larger in magnitude and duration. Also, disturbances had opposing dynamics on CPI, interest rate, inflation and narrow money velocity, but were positively correlated with the effective real exchange rate in the long- run. These findings are important; because, without them it is probable that a wrong policy mix or inappropriate portfolio allocation would be performed, resulting in a sub-optimal result.