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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

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posted on 01.11.2018, 14:56 authored by Hylton Hollander, Rangan Gupta, Mark Wohar
This article studies the effects of foreign (real) oil price shocks on key macroeconomic variables for South Africa: a net-importer of oil. We develop and estimate a small open economy New-Keynesian dynamic stochastic general equilibrium model with a role for oil in consumption and production. The substitutability of oil for capital and consumption goods is low, import price pass-through is incomplete, domestic and foreign prices and wages are sticky, and the uncovered interest rate parity condition holds imperfectly. Foreign real oil price shocks have a strong and persistent effect on domestic production and consumption activities 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, episodes of endogenous tightening of monetary policy 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.

History

School

  • Business and Economics

Department

  • Business

Published in

Emerging Markets Finance and Trade

Citation

HOLLANDER, H., GUPTA, R. and WOHAR, M.E., 2018. 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, 55 (7), pp.1593-1618.

Publisher

© Taylor & Francis

Version

AM (Accepted Manuscript)

Publisher statement

This is an Accepted Manuscript of an article published by Taylor & Francis in Emerging Markets Finance and Trade on 26 September 2018, available online: http://www.tandfonline.com/10.1080/1540496X.2018.1474346.

Acceptance date

04/05/2018

Publication date

2018-09-26

ISSN

1540-496X

eISSN

1558-0938

Language

en