The Impact of Oil Price Shocks on the Macroeconomy of Ghana

Abstract

The impact of oil price shocks on macroeconomic activities has attracted a great deal of attention since the 1970s first oil price shock. Initially, many studies argue that there exist a significant negative impact of oil price shocks on GDP, but recent empirical studies suggest a diminishing relationship between oil shocks and the macroeconomy. A key feature characterizing existing literature is that it applies predominantly to advanced oil-importing economies. For developing oil importing countries, different conclusions may be expected but this can be empirically ascertained. Despite the key role energy plays in industrial production and the socio-economic development of countries, many studies only focused on the causal link between oil price shocks and output. This study therefore, employs a restricted VAR model and Johansen Cointegration test to investigate the impact of oil price shocks on the macroeconomy of Ghana- a developing oil importing economy. The findings reveal that oil price shocks have significant negative impact on output and economic activities in Ghana. We further employ a nonlinear oil price shocks specification to account for asymmetric effects and we find that negative oil price shocks adversely affect economic growth whiles positive oil price shocks stimulate growth and increase output. Our results indicate a nonlinear oil-price macroeconomy relationship but no evidence of asymmetric effects exist between oil price shocks and macroeconomic variables in Ghana. This study recognizes that the magnitude of the percentage impact is small, however, this does not mean that the oil shock effects on the Ghanaian economy is negligible.

Keywords: Oil price shocks; Macroeconomy; Nonlinear models; Ghana; VECM.