What is it about?
This article studies the effects of foreign (real) oil price shocks on key macroeconomic variables for South Africa: a net-importer of oil. Using data from 1995 to 2017, we estimate a small open economy dynamic macroeconomic model with a role for oil in household consumption and firm production activities. We find that oil price shocks have a strong and persistent effect on domestic production and consumption and, hence, are a fundamental driver of output, inflation, and interest rates in both the short- and long-run. Oil price shocks also generate a trade-off between output and inflation stabilization. As a result, monetary policy that responds to inflationary pressures may slow the recovery of South Africa’s real economy. Our findings go further to suggest an important role for oil prices in predicting South African output during and after the recession that followed the 2008 global financial crisis.
Featured Image
Why is it important?
This research contributes to the small number of international articles on oil shocks in DSGE models for small open oil-importing countries. It is also the first dynamic general equilibrium model tailored to the South African economy to estimate the effects of oil (energy) usage on economic activity and policy.
Perspectives
The policy implications of this research article challenge the incumbent monetary policy framework of inflation targeting, and prompts some notable questions: How do we appropriately measure the impact of foreign supply-side shocks, and how should we respond to them? For example, the measurement of the official inflation target can deteriorate monetary policy credibility because foreign prices are not influenced by monetary policy (which has more direct influence over core CPI than headline CPI). In fact, a target such as nominal income or nominal GDP may be more appropriate to handle volatile foreign price shocks. Alternatively, what should the optimal inflation target be in this environment?
Dr Hylton Hollander
Stellenbosch University
Read the Original
This page is a summary of: The Impact of Oil Shocks in a Small Open Economy New-Keynesian Dynamic Stochastic General Equilibrium Model for an Oil-Importing Country: The Case of South Africa, Emerging Markets Finance and Trade, September 2018, Taylor & Francis,
DOI: 10.1080/1540496x.2018.1474346.
You can read the full text:
Contributors
The following have contributed to this page
