## Oil Prices, External Income, and Growth: Lessons From Jordan

_IMF Working Papers, December 1, 2011_

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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

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### 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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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/oil-prices-external-income-and-growth-lessons-from-jordan-25428_