Elsevier

Energy

Volume 178, 1 July 2019, Pages 234-251
Energy

Visiting effects of crude oil price on economic growth in BRICS countries: Fresh evidence from wavelet-based quantile-on-quantile tests

https://doi.org/10.1016/j.energy.2019.04.162Get rights and content

Highlights

  • The effects of crude oil price on the economic growth are detected.

  • Heterogeneity exists in different countries, periods and quantiles.

  • Positive effects in the BRICS countries are found.

  • The empirical results are of great significance to maintain a safe and stable economic system.

Abstract

We try to empirically document the effects of crude oil price on the economic growth in BRICS countries using wavelet-based quantile-on-quantile method which is used to decompose the raw information into different investor horizons and address the comprehensive effects across different quantiles. We find evidence that the heterogeneous effects exist in different countries, periods and quantiles due to diverse oil policies and economic development. Moreover, we find a positive effect in the BRICS countries, which weakens when oil price is at a high level in Brazil and Russia, and weakens over time in India. Regarding China, the positive effect is shown in the short and medium term, then a negative impact occurs, however, oil price stimulates economic growth in the long run. For South Africa, a negative effect is only observed in the short run, yet the positive effect reemerges although diminishes over time. Our empirical results are of great significance for policy implications in BRICS countries to maintain a safe and stable economic system.

Introduction

The BRICS countries, i.e. Brazil, Russia, India, China, and South Africa, are the five most promising and largest developing economies around our world [1]. These developing countries are distinguished from other developing counties by the economic potential and population structure. For example, some facts and figures show that BRICS countries include about 45% of the whole population around the world and also they show strong economic and market potentials in the world's economies nowadays [2]. Besides, these countries have shown a dramatic economic development during the past decades in terms of investment and trade even the recent economic setbacks in the global economy. All these arguments highlight that BRICS countries have required more attention from global investors, policymakers and portfolio managers.

On the other hand, as an important basic energy product, oil accounts for about 40% of the world's energy consumption. In addition, it dominants about 94% of the energy used in the transport sector, which can further underline its importance [3]. Given that oil is the special commodity, which can play a vital role in the global economy, the effects of oil price on economic activity have been a hot topic in recent studies. Since the oil crisis burst in 1973, some researchers confirm that oil affects economic growth negatively (see e.g. Refs. [[4], [5], [6]]). However, Raza et al. [7] use the monthly data during 1979 and 2013 in the US to find out that oil has a positive influence on economic activity. Furthermore, many studies find out oil have different effects for major oil exporting and importing countries (see e.g. Refs. [8,9]).

Therefore, to understand the effects of crude oil price on economic growth in BRICS countries is of great importance to the policymakers. Such kind of knowledge may help policymakers to design proper policy to response the oil price volatility and try to enhance the economic development in the domestic countries.

Theoretically, this research can explain the potential effects of oil price on economic growth through the mechanism of capital accumulation [10]. When, for example, the global oil price is rising, saving would also grow and exceed the retirement of capital. In this case, the capital would start to increase. With accumulating the capitals, the economy would increase the output of oil exports, which results in an extra contribution to saving. Therefore, each new capital can provide some contributions to the output growth and savings due to the marginal productivity of capital.

Although there are many studies trying to address the topic in our paper, however, the mainstream literature usually focuses on advanced countries and using some conventional econometric methods (see e.g. Refs. [[11], [12], [13]]). And this paper makes the following contributions. First, given the special function of BRICS countries in our global economy, we want to contribute to the previous literature to have an in-depth study on effects of crude oil price on economic growth in BRICS countries by using the relatively advanced method, i.e. the wavelet-based quantile-on-quantile approach. Furthermore, the advantage of the quantile-on-quantile method is that the varying degree of the effects and heterogeneous tail dependence structure can be easily detected, in addition, we could use wavelet to re-consider this effects from different investment horizons to show more comprehensive results. On the other hand, we use the latest dataset to empirically document the dynamics of oil on economic growth which could provide fresh evidence for the countries across regions to design energy policy to enhance the domestic economic growth.

Given BRICS countries are the most promising emerging economies and they have shown dramatic economic growth in the past decades [1], yet the features of these countries have not addressed comprehensively. To our best knowledge, there is no contemporary literature on the effects in BRICS countries using wavelet-based quantile-on-quantile model. This highlights a gap that motives us to conduct this empirical research. The main objective is to empirically document the effects of crude oil price on the economic growth in BRICS countries for the policymakers to enhance the economic development in the domestic countries. The wavelet-based quantile-on-quantile method is utilized in our paper to find out the heterogeneous degree of the effects of oil on economic growth in different countries, which is helpful to observe upper and lower tail dependence structure, and we also use wavelet to check the effects from different investment horizons with the dataset from 1996Q2 to 2018Q3, which is of great significance for policy implications in BRICS countries.

By means of the novel theoretical model, our main empirical results show that heterogeneity exists in different countries. We find evidence that a rise in oil price would boost economic growth in the BRICS countries. For Brazil and Russia, the positive effect of oil price on economic growth weakens as oil price rises. In India, the positive relationship between oil price and economic growth weakens over time. Regarding China, the positive effect is shown in the short and medium term, and then a negative impact occurs. However, oil price stimulates economic growth in the long run. As for South Africa, a negative effect is only observed in the short run. After that, the positive effect reemerges although diminishes over time.

The rest of the paper is outlined as follows. Section 2 is the review part. Section 3 shows the methodology and data. Section 4 elaborates the estimated results. Section 5 concludes.

Section snippets

Literature review

After one early pioneering research of Hamilton [14], there have been bonds of academic works that have tried to examine the impact of oil price on the macroeconomic activities. Hamilton [14] shows that oil shocks have contributed to some US recessions after World War II. In addition, it also implies that energy price can improve the post-OPEC macroeconomic performance. After that, Hamilton [14] proves the relationship between oil price and recession. Later, Huang et al. [15] examine the

Methodology and data

In this section, the wavelet and quantile-on-quantile regressions are utilized to empirically address the effects of crude oil price on the economic growth in BRICS countries at different investment horizons. First, we employ wavelet method to decompose the raw information into different investor horizons; second, the quantile-on-quantile regressions are used to document the comprehensive effects across different quantiles. Therefore, compared with the conventional econometric methods, such as

Empirical results

Via quantile-on-quantile approach, it is easy to document the effects of oil price on economic growth in five countries in various periods. In Fig. 1, apparently, the effects vary from country to country and over quantiles.

In Brazil, the oil price has a positive effect on economic growth at all quantiles, and this effect weakens with the increasing of the quantile of oil price. For different timescales, in a short term, such as D1, a slight and a strong negative association between oil price

Conclusions

This study makes use of dataset from 1996Q2 to 2018Q3 in BRICS countries to empirically address the impact of crude oil price on economic growth. We employ wavelet and quantile-on-quantile (QQ) regressions to empirically address this specific effect in BRICS economies at different investment horizons. First, wavelet method is utilized to decompose the raw information into different time horizons; second, the QQ method is used to empirical address the comprehensive effects of crude oil price on

Acknowledgments

This work is supported by a grant from Guangdong Social Sciences Project (Finance Research Project) of the 13th Five-Year Plan (“Research on Systematic Financial Risk Measurement and Application in Guangdong Province”, No. GD18JRZ07). All authors are grateful to the editor, anonymous reviewers for suggestions and comments. All errors are ours.

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