OIL PRICE DYNAMICS AND FINANCIAL DEVELOPMENT: DOES DEMOCRACY MATTER? EVIDENCE FROM A PANEL SMOOTH TRANSITION REGRESSION MODEL


Kassouri Y., Altıntaş H.

EEBSCON'19 – International Congress of Energy, Economy and Securi ty, İstanbul, Turkey, 6 - 07 April 2019, pp.51

  • Publication Type: Conference Paper / Summary Text
  • City: İstanbul
  • Country: Turkey
  • Page Numbers: pp.51

Abstract

This paper studies the relationship between oil price and financial development and investigates whether the oil price-financial development nexus varies across countries according to the level of democracy. We contribute to the literature by (i) employing a factor model methodology to address concerns related to unobservable common shocks, endogeneity and heterogeneity in the estimation of the oil pricefinancial development nexus. (ii) relying upon the estimation of panel smooth transition regression models to estimate the role of democracy in the oil price-financial development nexus. Using data of 14 oil exporting countries over the 1984-2016 period, there is evidence of an oil curse in the financial development, which further matches the theoretical predictions of the oil curse paradox. Whilst oil price fluctuations negatively affect financial development outcomes, this effect is nonlinearly related to the degree of democratic accountability. Specifically, we provide new evidence in favor of the financial resource curse at lower levels of democratic accountability, while better governance and democratic accountability neutralize the curse in the financial sector. Moreover, our results are robust to several measure of financial developments. We suggest that democratic accountability has the necessary institutional infrastructure to consolidate a more resilient and inclusive financial sector in emerging/developing oil exporting countries, which is fundamental to avoid the allegedly harmful effects of oil price fluctuations.