The Effect of Falling Oil Prices on Major Oil Exporting Countries through Trade and Financial Channels: A GVAR Model

The researches have generally ignored the effect of an oil price shock passing through financial channel. To fill this gap, we examine the impact of a fall in oil price on output and inflation through trade and financial channels by using a Global VAR (GVAR) model in oil-exporting countries. Our sample includes 15 OPEC and non-OPEC oil-exporting countries, 14 oil-importing countries and European :union: as a block. Our GVAR model is estimated for the period 1990Q1-2017Q4. We show that a combination of trade and financial channels better capture the oil shock transmission mechanism in our model. The impulse-response functions indicate that an oil price falling results in a sustained decline in output of oil-exporting countries. Furthermore, the impact of a negative oil price shock on inflation in developing oil-exporting countries is positive, whereas its effect on the inflation in developed oil-exporting countries is negative. Moreover, we show that the responses of real exchange rates to a falling oil price might partially explain higher inflation rate in these countries. We conclude that a fall in oil prices might bring about stagflation in developing oil-exporting countries. These findings might have importance policy implications for policymakers and social planners in developing oil-exporting countries.