The Impact of Oil Price Volatility on Economic Stability: Evidence from Southeast Asia

Large price increases and decreases reflect a rise in the volatility of oil prices since the 1970s and 1980s. Recent research and events have proved that volatility in oil prices have significant adverse effects on certain sectors of the economy, especially in the short term, hence disrupting economic stability. This takes place through three different channels: domestic economic output, non-residential investments, and via high costs of adjustments and suboptimal output levels. While a large amount of evidence on this subject comes from studies on the U.S. economy there is a dearth of research on developing and emerging economies. Thereby this paper employs a time series econometric model and panel regression system in order to assess the impact of oil price volatility on four major emerging Southeast Asian economies, namely, Indonesia, Malaysia, the Philippines and Thailand. The data used is quarterly data ranging from 1987-2012 extracted from the International Financial Statistics CD-ROM 2012. The two main economic indicators assessed are GDP Growth and Investment. Oil price volatility is measured by using daily oil prices to construct quarterly Realized Volatility (RV). The study finds that oil price volatility has a significant impact on GDP growth and investment for Malaysia and Thailand and shows no major impact for Indonesia and the Philippines. The policy implications of these results are that these countries should pursue policies that help stabilize the economy, especially by hedging against oil prices to mitigate the risk in the short term and diversifying its portfolio of energy resources in the long term