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ID: 128399

Permanent and transitory oil volatility and aggregate investmen / Ibrahim, Mansor H; Ahmed, Huson Joher Ali

Ibrahim, Mansor H	Journal Article
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Publication

2014.

Summary/Abstract

This paper investigates the relation between aggregate investment and oil volatility and its permanent and transitory components for a developing country, Malaysia. In the paper, the components generalized autoregressive conditional heteroskedasticity (CGARCH) model is utilized to decompose conditional oil volatility into permanent oil volatility and transitory oil volatility. Respectively reflecting fundamental-driven and random shifts in oil volatility, they are expected to exert differential effects on aggregate investment. Adopting a vector autoregression (VAR) framework to allow feedback effects between aggregate investment and its determinants, the paper documents evidence supporting the adverse effects of conditional oil volatility, permanent oil volatility and transitory oil volatility on aggregate investment and real output. Interestingly, contrary to the findings for the developed markets (US and OECD), the real effects of permanent oil volatility tend to be stronger. These findings are reasonably robust to variable specification and measurements in the VAR system. Hence, there is an indication that heightened oil volatility accounts for the slumps in Malaysia's aggregate investment after the Asian financial crisis.

Key Words

Malaysia ; Oil Volatility ; Aggregate Investment

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ID: 110745

Role of oil price shocks on macroeconomic activities: an SVAR approach to the Malaysian economy and monetary responses / Ahmed, Huson Joher Ali; Wadud, I K M Mokhtarul

Ahmed, Huson Joher Ali	Journal Article
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Publication

2011.

Summary/Abstract

This study examines the impact of oil price uncertainty on Malaysian macroeconomic activities and monetary responses. We use a structural VAR (SVAR) model based on monthly data over the period 1986-2009. The EGARCH model estimates show an important asymmetric effect of oil price shocks on the conditional oil price volatility. Dynamic impulse response functions obtained from the SVAR model show a prolonged dampening effect of oil price volatility shock on Malaysian industrial production. We also find that levels of Consumer Price Index (CPI) decline with a positive shock to oil price uncertainty. This is the result of negative demand shock due to the postponement of consumption of big ticket items by individuals, households and other sectors of the economy. We also found that the Malaysian central bank adopts an expansionary monetary policy in response to oil price uncertainty. Variance decomposition analysis reconfirms that volatility in the oil price is the second most important factor to explain the variance of industrial production after its own shocks. These results shed some light on how the central bank of Malaysia can use controlling mechanisms to stabilize aggregate output and price level.

Key Words

Structural VAR ; Oil Price Volatility ; Macroeconomic Activities

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