Macroeconomic instability versus oil curse: an empirical assessment in oil exporting countries

This paper tests empirically the Dutch disease macroeconomic dynamics in a set of oil exporting countries. Accordingly, this study was put forth to provide an assessment of the Dutch disease symptoms, by focusing on the link between macroeconomic instability indicators and economic growth. To this end, we assess the risk to real exchange rate, government spending and price stability from the oil incomes fluctuations and from the institutional weakness. Based on a gradual regime switching model, we examine the potential nonlinearities in the economic growth’s responsiveness to macroeconomic instability within a Panel Smooth Transition regression (PSTR) model. Our findings highlight a nonlinear and negative impact of real exchange rate appreciation, high public expenditures and price instability on economic growth. These effects are amplified in highly oil dependent countries via the Dutch disease mechanisms. However, these macroeconomic distortions could be reversed with an adequate policy response and more generally with good governance. Indeed, above a certain threshold of government effectiveness, the negative drawbacks from both macroeconomic instability and oil dependence are lower. JEL Classification: C23, O1, O4, Q3.