Posted by: mulrickillion | December 30, 2011

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

By Kamiar Mohaddes and Mehdi Raissi

International Monetary Fund (IMF), Working Paper No. 11/291, December 2011 —

Summary: This paper 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. 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 paper confirms the hypothesis that a large share of Jordan’s output volatility can be associated with fluctuations in net income received from abroad. 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.

[An excerpt from the Working Paper reads]:

A number of models have been estimated for the Jordanian economy in the past, such as International Monetary Fund (1998), Maziad (2009), and Beidas-Strom and Poghosyan (2011) among others, though most of these models do not have a coherent global dimension and interdependencies between the domestic and foreign variables are not explicitly modelled. Jordan as a small open economy with close trade/financial linkages with the rest of the world is expected to be strongly influenced by developments in the world economy, such as by changes in the foreign interest rates, international oil price movements, and global economic growth. Monetary policy positions taken by other countries are also likely to affect Jordan’s macroeconomy, given its fixed exchange rate regime and open capital account. However, little is known or has been previously done regarding the significance of these factors in shaping Jordan’s macroeconomic growth. We therefore develop a framework that features: 1) a theory derived long-run output equation that recognizes the importance of oil price movements (and so external income) for long-run growth; 2) a careful and parsimonious approach to incorporating foreign variables into the macroeconomic equations in Jordan; 3) joint modeling/estimation of the model variables so that we account for the simultaneity problem; 4) use of quarterly data; and 5) a bootstrap non-parametric method that addresses the problem of small sample data as the model has only 121 observations only. This method is later applied to test the number of cointegrating relations and the significance of LR statistics of the over-identifying restrictions, as well as to obtain confidence intervals for the impulse responses. . . .

>>Read the full Working Paper here (wp11291.pdf).

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

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