A Panel VAR Analysis of Oil Supply and Demand Shocks and Macroeconomic Performance : The Case of Gulf Cooperation Council Countries

This paper contributes to the existing empirical literature by exploring the asymmetric impact of supply-driven and demand-driven oil price shocks on the economic performance of oil exporting countries. The study is carried out using the panel vector autoregression (P-VAR) framework and annual panel data for six Gulf Cooperation Council (GCC) countries and their trading partners over the period from 1980 to 2019. The impulse response functions show that the symmetric effects of oil shocks (’all’ shocks) on the output gaps of GCC countries and their partners are mitigated. However, using our oil shock asymmetric specification, we find evidence that the output gaps react positively to the oil demand shocks and negatively to the oil supply shocks. Thus, the asymmetric oil price specifications produce different levels of effect of oil price shocks on fiscal balance, inflation and imports. Monetary policy reacts negatively to the oil demand shock and positively to the oil supply shock. The policy implication suggests that the use of fiscal policy to reduce the impact of negative oil price shocks on economic activity in GCC countries should be appropriate to the source of the oil price shock