Differential impact of oil price shocks on external balance, stock market, inflation and output in Ghana.

Abstract

Crude oil is an essential commodity for the growth and development of Ghana’s economy. Studies that examine the effect of oil price fluctuations on Ghana’s economy have mainly focused on analysing the effect of changes in the price on output and inflation. Oil prices are however driven by supply and demand factors. This implies that impact of oil price fluctuations on an economy may be different depending on its source (demand or supply). This study examines the differential impact of origin of oil price shocks on external balance, stock market activity, inflation and output in Ghana. Using an SVAR model, oil price shocks is decomposed into oil supply shocks, aggregate demand shocks and oil market specific demand shocks. Their impacts on external balance, stock market activity, inflation and output were analysed using a combination of ARDL, Markov Switching models, impulse response and variance decomposition analysis. The results of the study revealed oil price shocks tend to have differential impact on external balance, stock market activity, inflation and output in Ghana. Specifically, oil demand shock was found to have positive effect on external balance whilst the effect of oil market specific shock was found to have negative effect on external balance. The effect of oil supply shock on external balance was mixed. In terms of stock market activity, oil demand shock was found to positively affect stock market activity whilst the effect of oil market specific demand shock was mixed. The effects of oil demand shock on output were positive whilst its effect on inflation was mixed. On the other hand, the effect of oil market specific demand shocks was inflationary and output depressing. The study iii therefore recommends that policy initiatives to minimize the effect of oil price hikes should take into account the source of the price shock.