Essays on Commodity Prices and Macroeconomic Performance of Developing and Resources Rich Economies: Evidence from Kazakhstan Open Access
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My dissertation consists of three essays in empirical macroeconomics. The objective of this research is to use rigorous time-series econometric analysis to investigate the impact of commodity prices on macroeconomic performance of a small, developing and resource-rich country, which is in the process of transition from a purely command and control economy to a market oriented one. Essay 1 studies the relationship between Kazakhstan’s GDP, total government expenditure, real effective exchange rate and the world oil price. Specifically, I use the cointegrated vector autoregression (CVAR) and error correction modeling (ECM) approach to identify the long and short-run relations that may exist among these macroeconomic variables. I found a long-run relationship for Kazakhstan’s GDP, which depends on government spending and the oil price positively, and on the real effective exchange rate negatively. In the short run, the growth rate of GDP depends on the growth rates of the oil price, investment and the magnitude of the deviation from the long-run equilibrium. Essay 2 studies the inflation process in Kazakhstan based on the analysis of price formation in the following sectors: monetary, external, labor and goods and services. The modeling is conducted from two different perspectives: the first is the monetary model of inflation framework and the second is the mark-up modeling framework. Encompassing test results show that the mark-up model performs better than the monetary model in explaining inflation in Kazakhstan. According to the mark-up inflation model, in the long run, the price level is positively related to unit labor costs, import prices and government administered prices as well the world oil prices. In the short run, the inflation is positively influenced by the previous quarter’s inflation, the contemporaneous changes in the government administered prices, oil prices and by the changes of contemporaneous and lagged unit labor costs, and negatively affected by the previous quarter’s mark-up. Essay 3 empirically examines the determinants of the trade balance for a small oil exporting country within the context of Kazakhstan. The dominant theory by Harberger-Lauren-Metzler (HML) predicts that positive terms of trade shocks will improve the trade balance in the short run, but will fade away in the long run. I estimate cointegrated vector autoregression (CVAR) and vector error correction model (VECM) to study the long-run and short-run impacts on the trade balance. The results suggest that, in the long run, an increase in the terms of trade has a positive effect on the trade balance, an increase in GDP and appreciation of the real effective exchange rate have negative effect on the trade balance. In the short run, the terms of trade has a direct positive impact on the trade balance, real income and real exchange rate. On the other hand, appreciation of the currency has a negative impact on the trade balance. The error correction term, which represents the deviation from the long- run equilibrium between the trade balance, real income, terms of trade and real exchange rate, has a negative effect on the growth rate of the trade balance. These results provide further evidence to the idea that, in the long run, the HML effect not only depends on the duration of the shock, but also depends on the structure of the economy.