Does The Oil Price Shock Affect The Budget Deficit Of Net Oil Exporting And Importing Countries?

This paper investigates the impact of oil price shock on the budget deficit of 25 net oil exporting countries and 28 net oil importing countries using 1996 to 2016 data.Most papers in the literature tend to focus on the impact of oil price shock to macroeconomic variables and trade deficit.There is not much work on analyzing the impact of the oil price shock to the ratio between the budget deficit and GDP.We apply a fixed effect panel data model to estimate the magnitude of the oil price shock to the budget deficit ratio.To remove the impact of other related variables,we control 11 variables in the regression,including inflation rates,unemployment rates,economic growth rates,interest rates,trade deficit,voice and accountability,political stability,government effectiveness,regulatory quality,rule of law,and control of corruption.To measure the asymmetry effect of the oil price shock,we decompose the shock into negative and positive shocks,and estimate the impact separately.Our empirical results show that the oil price shock generate a significantly negative impact to the budget deficit ratio of net exporting countries.That is to say,when the oil price goes up,the budget deficit ratio will be reduced,while the decreasing of oil price will increase the budget deficit ratio.For the analysis of positive and negative shocks,we find that the negative shock will generate larger impact to the ratio.The reason is that the decreasing of oil price will reduce the revenue of the net exporting countries,but the expenditure is usually hard to be reduced due to payment stickiness.The increasing of oil price will increase the revenue of the net exporting countries but at the same time,the expenditure will also increase faster.For net importing countries,there is no evidence to show that oil price changes can significantly affect the budget deficit ratio.The potential reason is that for most of the net importing countries,such as U.S.,China,Japan and India,their economy structures are very balanced.Some part of economy will benefit from the reduction of oil price while the other may be hurt by lower oil price.Therefore,in total,we cannot find any significant impact from the oil price shock.