Oil, Volatility, and Institutions

Abstract

This chapter examines the long-run effects of oil revenue and its volatility on economic growth, as well as the role of institutions in this relationship. We collect annual and monthly data on 17 major oil producers between 1961 and 2013, and use the panel autoregressive distributed lag (ARDL) approach as well as its cross-sectionally augmented version (CS-ARDL) for estimation. Therefore, in contrast to earlier literature on the resource curse, we take into account all three key features of the panel: dynamics, heterogeneity, and cross-sectional dependence. The results suggest that: (i) oil revenue volatility has a significant negative effect on output growth; (ii) a higher growth rate of oil revenue significantly raises economic growth; and (iii) better fiscal policy can offset some of the negative effects of oil revenue volatility. We therefore argue that volatility in oil revenues combined with poor governmental responses to this volatility drives the resource curse paradox.