Effects of oil price and global demand shocks on small island developing states

Abstract

I employ a global VAR framework for 25 SIDS using annual data over the period 1980 to 2015. A key innovation associated with this research is the use of remittance weights to capture the close financial linkages between SIDS and advanced economies such as the US. I find that oil price shocks do not have a statistically significant negative effect on economic growth in most individual countries and different regions. Economies that are oil-intensive perform better than their low-intensity counterparts, but economic growth is likely to be greater if economies transition towards a more diversified energy supply mix. In terms of a negative demand shock to US GDP, output in SIDS decline more for those regions that have close economic ties with the US and are within its geographical proximity. From a policy standpoint, these results highlight the importance of gearing policy towards energy diversification and designing outward-oriented economic policies to guard against future oil price shocks.