Effects of oil price shocks on industrial production: evidence from some oil-exporting countries.

This paper examines the effects of oil price shocks on industrial production in three oil-exporting countries, namely Iran, Saudi Arabia and Indonesia using annual data for the period 1970–2005. First, the Gregory and Hansen cointegration technique, allowing for the presence of potential structural breaks in data, is applied to empirically examine the long-run co-movement between oil price and output. Second, we test whether different measures of oil price shocks, including non-linear or asymmetric ones, Granger-cause output. The results indicate a strong causality from oil price shocks to output growth for Iran and Saudi Arabia. Moreover, the oil prices–output relationship in these two countries appears more significant when asymmetric specifications are used to model the relationship between variables. In the case of Indonesia, however, none of the oil proxies have any significant effect on output both in the short and long run. The results confirm the relatively successful experience of countries such as Indonesia in the diversification of the real sector to minimise the harmful effects of oil booms and busts. [ABSTRACT FROM AUTHOR]