The dynamic effects of oil price shocks on output and domestic prices in Egypt : an SVAR approach -

Abstract

This paper analyzes the dynamic effects of oil price shocks on Egypt’s economy, represented by real output and the price level, using a Structural Vector Auto-regressive (SVAR) analysis based on an identification strategy developed by Blanchard and Quah (1989). The main findings of the study are twofold: First, an oil shock operates through the supply channel and thus has stagflationary effects on the economy. Second, while the oil shock is relatively more important in explaining the fluctuations in output compared to the movements in the consumer price level, its impacts on both variables is weak. Consequently, the policy implications drawn from these results go beyond merely suggesting the development of efficient alternative energy sources to enhance substitutability, the reduction of oil-intensity, and trade diversification as ways to mitigate the long-run impacts but also emphasize the need to adopt countercyclical monetary policies, especially for the purpose of short-run output stabilization. The results also invite for fiscal expansion in the case of an increase in the commodity’s prices while taking into consideration that output is mainly affected by supply-side policies whereas the price level is mostly affected by the demand-side ones. Policy responses should, however, place less weight on oil and focus on the goods, services and commodities that are found to be the most influential in Egypt’s consumer price basket and to dominate the household consumption patterns and the industry’s raw and intermediate inputs.