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Published on: August 13, 2019
Modeling the time-varying effects of oil rent on manufacturing: implications from structural changes using
Ramez Abubakr Badeeb1,2, Jeremy Clark3, Abey P Philip4
1Faculty of Art and Social Sciences, Nottingham University Business School, The University of Nottingham, Malaysia, Jln Broga, 43500, Semenyih, Selangor, Malaysia. r-badeeb@hotmail.com.
Abstract:
Previous "oil curse" studies primarily estimate a single, linear effect of oil rents on income using time-invariant parameters over entire sample periods. This means the true effects of oil dependence cannot be captured if structural changes are taking place, or effects are non-linear. We introduce a two regime Markov-switching model into the resource effects literature to assess the time-varying effects of oil rent dependence on the Malaysian manufacturing sector. We also allow for non-linear threshold effects. We find the impact of oil rents is regime-dependent. Under a rarer "first regime" structure, there is no significant effect. Under a predominant "second regime," there is an inverted U-shaped effect, with oil rents' share of GDP up to 8% positively associated with manufacturing, and negatively associated beyond this. We find connections between regime changes and the 1997 Asian financial crisis and 2008 global financial crisis. Implications for effective diversification policies are discussed.
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