Oil price fluctuations and the small open economies of Southeast Asia: An analysis using vector autoregression with block exogeneity

We use a vector autoregressive model with block exogeneity to study the macroeconomic effects of oil price fluctuations for six small open economies in Southeast Asia. Our method has an advantage over those used in the literature in that it allows us to focus on the effects of oil shocks while avoiding unnecessary, and often ad hoc and unrealistic, assumptions on the structure of a small open economy. Our main findings are as follows. First, with respect to output and price variation, the oil importing countries the Philippines, Singapore, and Thailand are more sensitive to the situation in the world oil market than the oil exporting countries Indonesia, Malaysia, and Vietnam. Second, the monetary authorities of these countries have responded to oil price changes caused by oil-market specific demand shocks. Third, in explaining the inflation surge of 2007-2008, the oil price channel was important in Indonesia and the Philippines, but not in the other four countries under investigation.