Oil shocks and macroeconomic policy uncertainty in South Africa

Abstract

The study reevaluates the connection between oil shocks and macroeconomic policy uncertainty in South Africa over the period of 1990M1 to 2022M6 using spillover connectedness frameworks and Quantile-on-quantile regression analysis. The link between oil shocks andmacroeconomy rests on the Neoclassical theory following the Hamilton (2005) production function framework. The following findings are apparent from the analysis. First, the average- based connectedness framework shows a moderate connection between oil shocks and macroeconomic policy uncertainty parameters. Economic policy uncertainty and political uncertainty exhibit the most prominent bi-directional spillovers, while political uncertainty and oil consumption demand shocks function as net spillover transmitters. However, using the quantile approach, the level of connectedness between oil shocks and macroeconomic policy uncertainty parameters is stronger and much higher at both tails of the conditional distribution. Specifically, the study finds that macroeconomic policy uncertainty parameters act as net receivers at lower quantiles, while all the oil shocks and financial policy uncertainty act as net receivers at median quantiles, and economic activity shocks and oil inventory demand shocks act as net receivers at upper quantiles. Thus, the application of the average based framework of connectedness is inadequate and restrictive. Finally, using the Quantile-on-Quantile regression analysis, the results demonstrate a substantial positive (negative) relationship between the upper quantiles of oil shocks and the lower (upper) quantiles of macroeconomic policy uncertainty. These findings suggest that policymakers keep an eye on the repercussions of oil shocks on macroeconomic conditions and develop monitoring frameworks that will help to predict the likely effects of external shocks emanating from oil. Simultaneously, investors should contemplate modifying their investment strategy regarding the circumstances and keep an eye on oil prices, government policies, and economic indicator