The effects of oil price shocks on the Philippine economy: a VAR approach
Date
2005-04
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Abstract
The study investigates the relationship between changes in crude oil prices and Philippine macroeconomy. Two sets of vector autoregression 01 AR) models are employed using linear and non-linear oil price specifications among five key macroeconomic variables: real gross domestic product, consumer price index, real effective exchange rates, real wages and money supply.
From the linear oil price specification V AR model, the impulse response functions reveal that oil price movements cause significant reduction in aggregate output and increase inflation. The variance decomposition shows that crude oil prices significantly contribute to the variability of real GDP and inflation. On the other hand, positive oil price changes from the non-linear specification show a more persistent contraction in economic activity and worsen inflation more than the estimates obtained from the linear specification. Alternatively, negative oil price changes; nevertheless, show that real aggregate output falls and inflation rises despite declining world oil prices. Moreover, oil price decreases appear to play a greater role on each variable's variation than oil price increases, except for the case of real effective exchange rate.
Despite these macroeconometric results, caution must be exercised in formulating energy policies since future effects of upcoming oil shocks will not be the same as what happened in the past (known as "Lucas Critique"). Explorations and development of practicable alternatives to imported fuel energy will cushion the economy fromĀ· the repercussions of oil shocks.
Future studies should employ other macroeconomic variables to represent economic activity, price level and monetary policy as well as unemployment and fiscal policy reactions. The government's statistical agencies must maintain comprehensive databases on energy that will include micro-level data in order to more accurately assess how each sector of the economy is affected by oil price shocks.
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Keywords
Oil price, Fuel, Energy policy, Oil, VAR approach, Fuel price volatility