“The Impact of International Oil Price Uncertainty on Household Consumption Expenditure across Asia”

David Broadstock, The Hong Kong Polytechnic University

Dayong Zhang, Southwestern University of Finance and Economics

While it is broadly accepted that extreme movements in oil prices have implications for macroeconomic growth trends, relatively limited attention has been given to the more specific effect it may upon spending within the residential sector. To deepen our understanding of the consequences of international oil price shocks upon residential consumption, we adapt and extend the framework of Mehra and Peterson (2005)—which captures the effect of oil shocks inside the short run dynamics of an error correcting consumption function—to a sample of countries in the Asia region. A key contribution of this work is to allow the short run dynamics to be time-varying, modelled within a Bayesian dynamic econometric framework capable of revealing highly complex time-varying structure in the influence of oil shocks. The results ultimately attest to the growing consensus that oil shocks, while important, are not an everyday phenomenon and that their effects appear intermittently and do not always generate the same reaction. This evidence is consistent across the cross-section of countries included in the sample, adding robustness to the conclusions.