Sources of oil price shocks and external balance in Ghana

Abstract

Faced with intermittent challenges of maintaining a stable external balance, several reports (see for example Bank of Ghana, 2005, 2009, 2015) attribute external imbalances to oil price shocks as a primary concern. Developments in the oil price literature however, suggest that effect oil price shock on macroeconomic variables depends on the source of the price shock. Hence, we examin the impact of oil price shocks on Ghana's external balance considering the source of the price shock. We employ a two-stage estimation which involved SVAR and ARDL. Results reveal that oil demand shocks tend to have a positive long run effect on external balance and oil market specific demand shock was also found to negative long run effect. Whereas oil supply shock was found to have a negative impact on trade balance and current account balance, its effect on capital account balance was positive. The implication of this result is that output in industrial commodities must be expanded following an oil price shock that is as a result of oil demand shock, since oil demand shock is usually an indication of expansion in global economic activities and leads increased demand for such commodities.