Oil Prices, External Income, and Growth: Lessons From Jordan
IMF Working Papers, December 1, 2011
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- Oil Prices, External Income, and Growth: Lessons From Jordan
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Bibliographic details
- Authors: Mehdi Raissi, Kamiar Mohaddes
- Published: December 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463927257.001
Objective and Theoretical Framework
- Extends the long-run growth model of Esfahani et al. (2009) to a labor exporting country that receives large inflows of external income—the sum of remittances, FDI and general government transfers—from major oil-exporting economies.
- The theoretical model predicts real oil prices to be one of the main long-run drivers of real output.
- Identifies two long-run relationships predicted by theory:
- An output equation (long-run output relation).
- An equation linking foreign and domestic inflation rates.
Data and Empirical Approach
- Uses quarterly data between 1979 and 2009 on core macroeconomic variables for Jordan and a number of key foreign variables.
- Employs co-trending restrictions, error correction terms, error-correction equations, and tests including LR statistic and multiple correlation coefficient.
- Technical terms and methods referenced: Fisher equation, least squares, test statistics, error correcting relations, foreign output and inflation shocks.
Key Findings and Quantitative Results
- Long-run determinants of real output:
- Oil prices through their impact on external income and in turn on capital accumulation.
- Technological transfers through foreign output.
- Empirical confirmation:
- A large share of Jordan's output volatility can be associated with fluctuations in net income received from abroad (remittances, FDI, general government transfers).
- Cautions from empirical results:
- External factors cannot be relied upon to provide similar growth stimuli in the future.
Policy Implications and Recommendations
- It will be important to diversify the sources of growth in order to achieve a high and sustained level of income.
- Implicit policy focus areas drawn from findings:
- Reduce dependence on oil-price-driven external income.
- Strengthen domestic capital accumulation mechanisms independent of external income volatility.
- Facilitate technological transfers and linkages to foreign output in ways that support domestic productivity.
Subject Areas and Keywords (as listed)
- Subject: Commodities, Foreign exchange, Inflation, National accounts, Oil, Oil prices, Personal income, Prices, Purchasing power parity
- Keywords: co-trending restriction, error correction term, error correction term of the long-run output equation, error-correction equation, external income, Fisher equation, foreign direct investment, foreign output and inflation shocks and error correcting relations, Global, Growth models, Inflation, interest rate, Jordanian economy, least squares, long-run relations, LR statistic, multiple correlation coefficient, Oil, oil income, oil price shocks, Oil prices, output equation, Personal income, price boom, Purchasing power parity, remittances, test statistics, WP
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