The role of economic development for the effect of oil market shocks on oil-exporting countries. Evidence from the interacted panel VAR model

This paper examines whether the effects of oil market shocks on economic activity and exchange rates in oil-exporting countries depend on the stage of economic development or the scale of oil exports. Within the framework of block-exogenous Interacted Panel Vector Autoregression (IPVAR), we show that both oil price and oil price uncertainty shocks affect the economies of oil-exporting countries. The responses of domestic variables to oil market shocks are heterogeneous across countries and the scale of these responses depend on the level of economic development. In general, the reaction of emerging market economies is more prominent than that of advanced economies. The combined contribution of oil market shocks to exchange rate volatility is inversely associated with the stage of economic development, but no such relation is observed for industrial production. The results obtained are robust to conditioning the responses on the scale of oil exports, restricting the sample to the non-covid pandemic period, and using the alternative measure for oil price uncertainty.

Automated summary

This paper examines how the effects of oil market shocks on oil-exporting countries' economic activity and exchange rates are influenced by the stage of economic development and the scale of oil exports. The findings show that the responses to oil market shocks vary across countries and depend on the level of economic development, with emerging market economies having more prominent reactions.