oil and the macroeconomy of kazakhstan prepared for the 30 th usaee north american conference,...

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Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz Department of Economics George Washington University

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Page 1: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Oil and the Macroeconomy of Kazakhstan

Prepared for the 30th USAEE North American Conference, Washington DC

By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Department of Economics George Washington University

Page 2: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Objectives

• Analyze the role of oil in Kazakhstan’s economy. Specifically, study the effects of oil price on the macroeconomic dynamics of Kazakhstan

• Attempt to find long-run relationship and short-run dynamics• The hypothesis is that capital stock and oil price are the major

determinants of GDP growth; and growth of GDP and oil price are the main sources of government revenue growth.

Page 3: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Summary of Results

• We found both long run and short run GDP and Revenue growth model• The long-run relationship yields

– Rise of the oil price and accumulation of capital stock raise the level of GDP.

– Higher level of government revenue is determined by higher level of GDP and world oil price

• In the short run– GDP growth rate is driven by changes in contemporaneous and lagged

oil price, but government taxation has a negative effect on GDP growth– Oil price has a direct positive effect on government revenue in addition

to the effects through error correction mechanism

Page 4: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Organization

• Brief Economic History of Kazakhstan• Literature Review• General Model• Data• Empirical Model for the DGP – Unrestricted

VAR• Cointegration Testing and Analysis• Equilibrium Correction Model

Page 5: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Kazakhstan: Gross Domestic Product

Basic Oil Exporting Country Macroeconomic Model:Linkage Economic Growth, Fiscal Revenues, Capital Stock, and Oil Sector

Page 6: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Government Revenue, real and nominal

Unit: USD

Page 7: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Oil Price, real and nominal

• In USD

Page 8: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Kazakhstan’ oil output, oil exports

Unit: in million barrels a day

Page 9: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Oil export’s share in total exportsOil output’s share in total output

Unit: (%)

Page 10: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Inflation (1992 – 2010)

1992 1993 1994 1995 1996 1997 1998 1999 2000

Inflation (%)

1381 1662 1402 176 39 17 7 8 13

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Inflation(%)

8 6 7 7 8 9 11 17 7 7

Page 11: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Inflation (1995-2010)

Unit: (%)

Page 12: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Employment (in millions)

Page 13: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Literature ReviewGronwald, Mayr and Orazbayev (2009): studied the effects of oil price decline on Kazakhstan’s real GDP, budget revenue, exports and real exchange rate => oil price decline has negative effect on these variablesRautava (2004): studied the effects of oil price on Russian GDP and government revenue using CVAR and VeqEM approach.10% permanent increase in oil price => 2.2 % rise in GDP, 4.6% in Rev.10% increase in oil price => 0.5% rise in GDP, 3.9% in Gov’t Rev.Ito (2008): studied the effects of oil price on Russian GDP and inflation using CVAR and VEC approach and found that oil price has a positive effect on GDP and inflationVenezeula: El-Anshasy, Bradley, Joutz (2007): used CVAR and VeqEM modeling approach to study the long run and short run relationship between oil price and Venezuela's GDP and government revenue.10% rise in oil price => 2.5% and 2.3% rise in the level of GDP and Rev, and adds 1.7% and 2.8% directly to the short run growth rate

Page 14: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

General Macro Model

• Basic Oil Exporting Country Macroeconomic Model:

Y = Kα*Lβ*(Poil)γ

• Linkage Economic Growth, Fiscal Revenues, Capital Stock, Labor and Oil Sector

Page 15: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Data (sample: 1996q1-2010q3)

• All in a log form

Page 16: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Data Analysis

• Sample period is 1996Q1 through 2010Q3• Capital stock represents the capital acquired after

1995q1 and used as a proxy for the entire capital stock in the economy

• Augmented Dickey Fuller Test The levels are nonstationary The first differences are stationaryÞ all of the five series are I(1) seriesÞ We can apply CVAR and VEC modelling approach

Page 17: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

VAR in Levels and Cointegration Analysis

• Lag Structure Analysis VAR(5) -> VAR(4) VAR (4) is the most appropriate• Model Stability 1-step Chow test Break point Chow test => model is stable• Johansen Test => two cointegrating vector

Page 18: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Long Run Equilibrium RelationsGDP and Government Revenue

• GDP relationsgdp = 0.35*capital stock + 0.46*oil price

• Government revenue relations revenue = 0.56*gdp + 0.44*oil price

• Capital stock is weakly exogenous => capital stock does not enter VEC model as

endogenous variable

Page 19: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Table 3: Final Vector Error Correction Model Sample Period 1996q1 – 2010q3

DLrgdp: Change in real quarterly GDPDLrgrev: change in real quarterly Government Revenue

 Equation for DLrgdp Coefficient t-value

 Equation for DLrgrev Coefficient  t-value

Constant 1.4676 6.71 Constant 0.3337 0.444DLrgrev_1 -0.3655 -8.49 DLroilprice 0.5321 3.11DLrgrev_2 -0.2032 -5.78 ECMg_1 -0.7552 -4.60 DLrgrev_3 -0.2078 -7.69 I:1998(4) 0.3758 2.84 DLroilprice 0.3486 6.99 I:1999(2) -0.3160 -2.14DLroilprice_1 0.1162 2.69 I:2005(4) 0.4023 3.05 ECMy_1 -0.4407 -6.70 I:2008(4) 0.6828 3.93ECMg_1 0.3272 6.84I:1998(4) -0.0810 -2.10 I:2009(2) -0.1570 -2.31sigma = 0.0341 sigma = 0.1169

RSS = 0.0383 RSS = 0.4513

R^2 = 0.9739 F(30, 70) = 9.7785 [0.0000]Vector AR 1-4 test: F(16,48) = 1.0870 [0.3927]Vector Normality test: Chi^2(4) = 3.6889 [0.4497] Vector Hetero test: F(51, 72) = 0.8709 [0.6967] Vector RESET2 test: F(8, 56) = 1.5634 [0.1569]

Page 20: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Interpreting the Final Error Correction Model

Feedback from Long-Run Relations• Inclusion and estimation of the CVAR provide important insights to long-

run economic performance• And provides information in the specification and understanding of the

short-run dynamics.

• Fiscal ECM enters the change equations for– GDP (0.32) higher revenue encourages higher spending– Government Revenue (-0.75) sluggish adjustment to deviation from

“steady-state”

• Economic Growth ECM enters the change equations for– GDP (-0.44) slow adjustment to deviations from “steady state”

Page 21: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Interpreting the Final Error Correction Model

Short-Run Dynamics (Growth or Changes)

• Contemporaneous and lagged oil price changes have a direct positive effect on GDP growth rate

• Changes in contemporaneous and lagged values of government revenue have a negative effect on GDP.

• Oil prices have a positive direct dynamic effect on government revenues.

Page 22: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Conclusions

• Comments and suggestions welcome• Thank you!

Page 23: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

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Autometrics – General to specific modeling algorithm

Hendry and Krollzig (2001) There are five basic steps:1. Specification of the GUM (General Unrestricted Model) by

the empirical modeler.2. Tests for mis-specification usually through residual

diagnostics.3. Begin Model Reduction Process. Investigation of possible

paths for variable selection. Elimination of “irrelevant” variables.

4. Test terminal models or paths for congruency.5. Evaluate terminal models for final model(s) through

encompassing tests.

End Result: Retain only Variables in GUM that Matter!!

Page 24: Oil and the Macroeconomy of Kazakhstan Prepared for the 30 th USAEE North American Conference, Washington DC By Ferhat Bilgin, Ph.D. Student and Fred Joutz

Reduction from the General Cointegrated VAR

• Process of Reducing the Statistical Model• Retain Characteristics of the Original Relationships in Data or

DGP• The pattern of short run dynamics is identified by sequentially

eliminating insignificant regressors and then estimating the resulting model with FIML.

• Hypothesis Tests used for Model Evaluation and Model Design• Parsimony• Maintain White Noise Property of Residuals• Stability• Interpretability• Final Model is Congruent