Current accounts and oil price fluctuations in oil-exporting countries

In this paper, we investigate the potential effects exerted by the level of financial development in the relationship between the current account and oil price changes in the case of oil-exporting economies. We go further than the existing literature by testing for the presence of nonlinearities in this relationship. In this respect, our paper is part of a series of works highlighting the evidence of nonlinearities associated to oil prices and current account patterns. It is also related to the most recent literature on the role of financial development in the growing trend of global imbalances (Chinn and Ito, 2007; Gruber and Kamin, 2009).

The baseline idea is the following: as the current account depends on the relationship between investment and saving which are both connected to the financial development, one can expect that oil exporters may be distinguished depending on their level of financial deepness. In particular, a high financially developed economy is expected to insulate more efficiently its domestic economy from oil price fluctuations. In order to test this hypothesis, our empirical analysis relies on a Panel Smooth Transition Regression (PSTR) specification for a sample of 27 oil exporters spanning the years 1980-2010. Indeed, a major strength of this approach is to derive coefficients of current account responses to oil price changes which may vary between countries and with time, depending on the level reached by a threshold variable defined here as the financial development.

Our main finding is that, while oil price movements can have a significant impact on current accounts of oil producers, their effect depends critically on the country’s level of financial development: the latter indeed exerts a nonlinear effect on the transmission of oil price changes to current accounts. Moreover, this result is robust to alternative measures of financial development and when controlling for the role of the official sector.