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Nonlinear effects of oil prices on inflation, growth, budget deficit, and unemployment

This paper attempts to determine the oil price threshold while analyzing oil price effects on several macro factors, such as inflation, GDP growth, budget deficit, and unemployment rate over the 2000–2015 period. | Nguyen Thi Ngoc Trang & Dinh Thi Thu Hong. / Journal of Economic Development 24(1) 75-91 75 Nonlinear effects of oil prices on inflation, growth, budget deficit, and unemployment NGUYEN THI NGOC TRANG University of Economics HCMC – trangtcdn@ueh.edu.vn DINH THI THU HONG University of Economics HCMC – hongtcdn@ueh.edu.vn ARTICLE INFO ABSTRACT Article history: In oil-exporting countries such as members of the OPEC, fluctuations in oil prices exert a significant impact on the domestic economy. Currently, a sharp reduction in oil prices results in several adverse effects; however, for such a crude-oil exporter that is also an importer of petroleum products as Vietnam, does a rise or drop in oil prices is beneficial to its development? This paper attempts to determine the oil price threshold while analyzing oil price effects on several macro factors, such as inflation, GDP growth, budget deficit, and unemployment rate over the 2000–2015 period. Using TVAR model, we detect an oil price threshold of USD27.6/barrel. Moreover, an increase in the price of oil, which exceeds this threshold, will cause a rise in inflation, budget deficit, and unemployment rate. Still, there is no significant evidence of the impact of oil prices on GDP growth. Received: Mar. 17, 2016 Received in revised form: May 19, 2016 Accepted: Dec. 31, 2016 Keywords: Oil price impact TVAR model Oil price threshold. 76 Nguyen Thi Ngoc Trang & Dinh Thi Thu Hong / Journal of Economic Development 24(1) 75-91 1. Introduction Similar to other kinds of materials, oil is one of the essential energy sources for manufacture and transport of goods. Oil prices, therefore, impact positively on production and consumer prices, and on the other hand their fluctuations should lead to temporary reduction in the total output as there is a pause in corporate investment under uncertain circumstances or due to rising costs in reallocation of resources. Despite being one of the crude oil exporters, due to limited .