How do Oil Price Shocks Affect a Small Non-Oil Producing Economy? Evidence from Hong Kong

Abstract

We find no evidence from either in-sample or out-of-sample analyses that an oil price shock would necessarily affect a small non-oil producing economy such as Hong Kong. In our in-sample recursive vector autoregressive investigations, oil price does not Granger cause the key macroeconomic indicators. The forecast errors from our out-of-sample examination using a vector error correction model with oil shocks, which represents an extension to previous studies, were found to be statistically the same as those from the vector error correction model without these shocks. The analysis leads us to dispel the conventional wisdom that a small non-oil producing economy is more vulnerable to oil shocks than a larger oil-producing economy such as the USA.