- Title
- An empirical investigation of the impact of oil rent, institutional quality, and exchange rates on economic growth, inflation and import prices in oil-producing countries
- Creator
- Aljamaan, Saleh A.
- Relation
- University of Newcastle Research Higher Degree Thesis
- Resource Type
- thesis
- Date
- 2024
- Description
- Research Doctorate - Doctor of Philosophy (PhD)
- Description
- The objective of this thesis was to examine the impact of oil rent and institutional quality on economic growth, the exchange rate–inflation nexus and the exchange rate–import price nexus in oil-producing countries. Many countries that produce oil depend heavily on the revenue generated from it. However, the impact of this revenue on the economy depends on how it is allocated and managed. The quality of a country's institutions also plays a significant role in shaping economic activity. Studies show that the effectiveness of using oil revenue in the economy is based on the institutional structure of the country. This confirms the importance of having high-quality institutions in place to properly allocate and manage oil revenue. Therefore, Chapter 3, Study 1 of the thesis examined the impact of oil rent on economic growth and investigated how institutional quality affects the relationship between oil rent and economic growth. Previous research suggests that having abundant oil rent can help a country manage exchange rates, which can contribute to price stability in oil-producing countries. Those who support monetary policy argue that implementing effective monetary policies can help stabilise the exchange rate. However, the current literature has not yet examined how oil rent and institutional quality affect exchange rate pass-through, especially in oil-producing countries. Consequently, Chapter 4, Study 2 and Chapter 5, Study 3 of the thesis examined the effects of oil rent and institutional quality on exchange rate pass-through to inflation and import prices, respectively, in oil-producing countries. This thesis comprises three empirical studies. Study 1 empirically investigated the effect of oil rent and institutional quality on economic growth, using comprehensive and reliable panel data for 84 oil-producing countries from 1970 to 2020. The study utilised an endogenous economic growth modelling framework and estimated the models using the Two-Step Instrumental Variable Generalised Method of Moment (2SIV-GMM) estimator. The study accounted for endogeneity, year-fixed effect and cross-section dependence. The empirical results indicate, first, that there is no empirical evidence of the Dutch disease phenomenon in oil-producing countries. The results show that oil rent enhances economic growth in oil-producing countries. Second, the results show that institutional quality positively affects economic growth. However, the interaction between oil rent and institutional quality reveals that institutional quality curtails the positive effect of oil rent on economic growth. Third, domestic investment, human capital and government consumption are growth-enhancing, while foreign direct investment, inflation and trade openness are growth-impeding. The results are robust to alternative model specifications, level of economic development and income grouping, for both Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC members, for pre- and post-GFC (global financial crisis) periods, and top oil-exporting countries. Study 2 empirically examined the effect of exchange rate pass-through on inflation and the moderating role of oil rent and institutional quality on the exchange rate–inflation nexus. The inflation models were estimated using the Two-Step System Generalised Method of Moment (2SS-GMM) estimator; the study accounted for endogeneity, cross-section dependence and country heterogeneity for 43 oil-producing countries from 1970–2020. Furthermore, the study investigated the asymmetric effects of exchange rates on inflation. The results indicate that exchange rates have a positive pass-through to inflation, except for developed countries, inflation-targeting countries, and the post-GFC period, where exchange rates had a negative pass-through effect on inflation. The study reveals that countries with managed currency regimes experience less exchange rate pass-through to inflation. While the impact of oil rent on the exchange rate–inflation nexus was mixed, institutional quality was found to moderate the impact of exchange rate pass-through to inflation. The results show that gross domestic product (GDP) growth and exporter costs exacerbated inflation in oil-producing countries. The findings are robust across alternative model specifications and alternative oil rent and institutional quality measures, for pre- and post-GFC periods, and top oil-exporting countries. Study 3 empirically tested the effect of exchange rate pass-through on import prices and the moderating role of oil rent and institutional quality on exchange rates and import prices nexus. The import price models were estimated using the 2SS-GMM estimator for 43 oil-producing countries from 1970–2020. The study accounted for endogeneity, cross-section dependence and country heterogeneity. The results indicate that the effect of exchange rate pass-through on import prices varies, with higher pass-through experienced during periods of exchange rate depreciation. The results reveal that developed countries, inflation-targeting countries and countries with flexible exchange rate regimes experience less exchange rate pass-through to import prices. The results indicate that, while the effect of oil rent on the exchange rate and import prices was mixed, institutional quality moderated the effect of exchange rate pass-through on import prices. The results show that GDP growth and exporter costs increased import prices. The results remain consistent with alternative model specifications, alternative oil rent and institutional quality measures, during pre- and post-GFC periods, and top oil-exporting countries. This thesis makes several contributions to policy. The first contribution draws from the empirical results of Chapter 3, Study 1. A major contribution relates to the theoretical debate and empirical contradictions on the Dutch disease hypothesis. Although previous studies explored the link between oil rent and economic growth, only some incorporated institutional quality in their endogenous growth models. Furthermore, most of these studies failed to critically examine the moderating role of institutional quality on the oil rent–economic growth nexus in oil-producing countries. The findings of this study provide new empirical evidence to inform policy formulation and implementation. The policy implication for oil rent is that oil-producing countries should focus on strategies to maximise the benefits of oil rent and promote sustainable economic growth. One effective approach is to ensure oil rent is used effectively, allocating a portion of oil rent towards long-term investment, such as infrastructure, education and other non-oil sectors of the economy. In addition, policymakers need to strengthen institutional quality by improving governance practices and redesigning institutional frameworks to better align with economic activities, particularly in the oil sector of oil-producing countries. This includes enhancing institutional adaptability and responsiveness to the economic repercussions of an oil boom. The second contribution is based on the key findings of Chapter 4, Study 2, which offers a distinctive theoretical and empirical framework of the direct and indirect effects of exchange rate, oil rent and institutional quality on inflation. Given the positive impact of exchange rate pass-through on inflation, the results emphasise the need for policymakers to implement effective monetary and fiscal policies when the currency depreciates. This action may include currency interventions, managing budget and spending plans, and adopting inflation-targeting measures to mitigate the impact of high exchange rate pass-through to inflation for oil-producing countries. The empirical results reveal a mixed effect of oil rent on exchange rate pass-through to inflation. Policymakers can utilise oil rent to manage the impact of the exchange rate on inflation by strengthening the country's exchange rate position. This can be achieved by accumulating foreign exchange reserves and investing oil revenue in non-oil sectors to diversify the economy, thus, contributing to maintaining economic stability. Furthermore, the empirical results of Chapter 4, Study 2, show that institutional quality can moderate the exchange rate–inflation nexus in oil-producing countries. This suggests the need for policymakers to strengthen institutional frameworks further by improving governance, reducing corruption, and strengthening regulatory frameworks to stabilise exchange rates and reduce inflation. The third contribution is based on key findings of Chapter 5, Study 3, which provides new empirical evidence for evaluating the direct and indirect effects of exchange rate, oil rent and institutional quality on import prices. The policy implication of the positive impact of exchange rate pass-through to import prices is the need for oil-producing countries to implement additional monetary and fiscal policies to mitigate high import prices during currency depreciation. This may involve supporting the local currency through foreign exchange rate reserves and trade policies, such as tariffs and quotas. The results of Study 3 suggest that policymakers need to reduce the oil rent effect on import prices by implementing strategies and fiscal policies to reduce high import prices in oil-producing countries, especially for developing countries and non-inflation-targeting countries during periods of currency appreciation. These measures will ensure that oil-producing countries avoid wasteful spending during high oil revenues, choosing, instead, to prioritise savings and direct investment towards sectors conducive to long-term economic stability. In addition, the empirical results of Chapter 5, Study 3, show that institutional quality could reduce the effect of exchange rates on import prices in oil-producing countries. The recommendation for policymakers is to improve institutional quality by fostering competition in domestic markets, thereby preventing monopolistic or oligopolistic practices that drive up import prices. Moreover, effective institutional quality can enhance the confidence and behaviour of investors and consumers through the effectiveness of monetary and fiscal policies.
- Subject
- oil rent; exchange rates; economic growth; inflation; import prices
- Identifier
- http://hdl.handle.net/1959.13/1514813
- Identifier
- uon:56857
- Rights
- Copyright 2024 Saleh A. Aljamaan
- Language
- eng
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