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Review of Middle East Economics and Finance

Ed. by Dibeh, Ghassan / Assaf, Ata / Cobham, David / Hakimian, Hassan / Henry, Clement M.

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1475-3693
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Volume 9, Issue 2

Oil Prices, External Income, and Growth: Lessons from Jordan

Kamiar Mohaddes / Mehdi Raissi
Published Online: 2013-08-30 | DOI: https://doi.org/10.1515/rmeef-2012-0011

Abstract

This article extends the long-run growth model of Esfahani, Mohaddes, and Pesaran (Journal of Applied Econometrics, 2012a, forthcoming) to a labor-exporting country that receives large inflows of external income – the sum of remittances, foreign direct investment, 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. Using quarterly data between 1979 and 2009 on core macroeconomic variables for Jordan and a number of key foreign variables, we identify two long-run relationships: an output equation as predicted by theory and an equation linking foreign and domestic inflation rates. It is shown that real output in the long run is shaped by (i) oil prices through their impact on external income and in turn on capital accumulation and (ii) technological transfers through foreign output. The empirical analysis of the article confirms the hypothesis that a large share of Jordan’s output volatility can be associated with fluctuations in net income received from abroad (arising from oil price shocks). External factors, however, cannot be relied upon to provide similar growth stimuli in the future, and, therefore, it will be important to diversify the sources of growth in order to achieve a high and sustained level of income.

Keywords: growth models; long-run relations; Jordanian economy; remittances; FDI; oil price shocks; foreign output and inflation shocks; error-correcting relations

JEL Classifications: C32; C53; E17; F43; F47; Q32

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About the article

Published Online: 2013-08-30


Pesaran and Smith (2011) argue that while DSGE models are very useful for motivating the long-run relationships, they should not constrain the short-run dynamics. See also Colander et al. (2008) and Leijonhufvud (2011) for other criticisms of the New-Keynesian DSGE models.

All variables are in nominal terms unless specified otherwise.

All estimations and test results in this article are obtained using Microfit 5.0. For further technical details, see Pesaran and Pesaran (2009), section 22.10.

See Esfahani, Mohaddes, and Pesaran (2012b) for an extensive discussion.

A similar relationship is also derived in Cavalcanti, Mohaddes, and Raissi (2011).

The 33 countries included are: Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Chile, Finland, France, Germany, India, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, Norway, New Zealand, Peru, Philippines, South Africa, Saudi Arabia, Singapore, Spain, Sweden, Switzerland, Thailand, Turkey, United Kingdom, and United States. These countries were chosen as we wish to later link the Jordanian model specified here to the global VAR (GVAR) framework initially developed in Pesaran (2004).

For further information, see U.S. Census Bureau (2007): X-12-ARIMA Reference Manual at http://www.census.gov/srd/www/x12a/

As International Monetary Fund (1998) did not have data for gross fixed capital formation, the implicit GDP deflator was used to derive a proxy for this. This might explain the large estimates for .

We also included a dummy as a deterministic variable in our model to capture the Jordanian balance of payments crisis during late-1988 and early-1989, as well as the 1990/1991 regional crisis due to the Persian Gulf War. However, once the effects of external income (through changes in oil prices) are taken into account, the estimates of the model with the dummy variable suggest only a modest average decline in real output due to balance of payments crisis and the war. These results are not reported but are available upon request. Therefore, we will concentrate on the model without the dummy variable.

A one standard error shock to the price of oil, foreign output, and inflation are equivalent to 15%, 0.6%, and 0.4%, respectively.

See also Cashin, Mohaddes, and Raissi (2012) for a discussion of the impact of different oil price shocks (supply-driven versus demand-driven) on MENA economies in general and Cashin et al. (2012) for a study of the impact of inward spillovers to Jordan from economic developments in the GCC. For a general discussion of oil price shocks, see Hamilton (1983, 2009).


Citation Information: Review of Middle East Economics and Finance, Volume 9, Issue 2, Pages 99–131, ISSN (Online) 1475-3685, ISSN (Print) 1475-3685, DOI: https://doi.org/10.1515/rmeef-2012-0011.

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