Key Macroeconomic Indicators’ Response to Oil Price Shocks in Yemen: Asymmetry in Focus

Abstract

The oil-based economy of Yemen is like other oil-based economies susceptible to global oil price shocks. Hence, this study examines the asymmetric responses of some Yemen's key macroeconomic indicators to oil price shocks from 1991 to 2022. To achieve this, the Nonlinear autoregressive distributed lag (NARDL) and its associated bootstrap NARDL are adopted for an augmented analysis of such response and association. Overall findings indicate that all variables are cointegrated and respond asymmetrically to shocks in oil prices with a greater magnitude for the negative shocks. Specifically, gross domestic product (GDPY) responds positively and significantly to negative shocks only in the short-term, and to both positive and negative shocks in the long-term. The exchange rate (EXCHRY) responds asymmetrically to shocks in both the short and long run, with significant long-term appreciation in response to positive shocks and significant short-term response to negative shocks. The study recommends that Yemen's policymakers develop a long-term strategy to diversify revenue sources beyond oil dependency.