Journal of Economics and Economic Education Research (Print ISSN: 1533-3590; Online ISSN: 1533-3604)

Abstract

Oil Price Overshooting, Monetary Policy and Economic Activity: Evidence from Oil Producing Nations

Author(s): Ebenezer Adesoji Olubiyi, Eunice Oluganna

This study focuses on the time adjustment paths of the oil price, industrial price and exchange rate in response to unanticipated monetary shocks in the oil producing countries. The basic Dornbusch model of overshooting was modified to include oil and industrial prices and then investigate the influence of this overshooting on economic activity. Annual data spanning 1991 to 2018 were extracted and Johansen’s cointegration test alongside a panel vector error correction model is employed to investigate the overshooting using the error correction terms of the variables. The empirical results indicate that all these prices overshoot their long run equilibrium. Oil price adjust faster to its long run equilibrium than exchange rate following innovations in the money supply. Vector error correction Granger Causality/Block Exogeneity Wald Tests is used to test for dynamic causality between the variables. Causation runs from money supply to oil price and GDP. GDP causes oil price as well. Further, oil price causes industrial prices and effective exchange rate. Also, Impulse response functions and Variance decompositions is used to show the effects of shocks on the adjustment path of the variables in the panel VECM model. Policy implications and recommendations are proffered based on these findings.