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The Nonlinear Effects of Oil Rent Dependence on Malaysian Manufacturing: Implications from Structural Change using a Markov-Regime Switching Model

Ramez Badeeb, Jeremy Clark and Abey P. Philip

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: Previous “oil curse” studies primarily estimate a single, linear effect of oil rents on income using time-invariant parameters over entire sample periods. This means the true effects of oil dependence cannot be captured if structural changes are taking place, or effects are nonlinear. We introduce a two regime Markov-switching model into the resource effects literature to assess the time-varying effects of oil rent dependence on the Malaysian manufacturing sector. We also allow for non-linear threshold effects. We find the impact of oil rents is regimedependent. Under a rarer “first regime” structure there is no significant effect. Under a predominant “second regime” there is an inverted U-shaped effect, with oil rents’ share of GDP up to 8% positively associated with manufacturing, and negatively associated beyond this. We find connections between regime changes and the 1997 Asian financial crisis and 2008 global financial crisis. Implications for effective diversification policies are discussed.

Keywords: Oil curse; Oil rent; Markov Switching Model; Manufacturing sector; Malaysia (search for similar items in EconPapers)
JEL-codes: C22 O11 O13 Q33 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2021-11-01
New Economics Papers: this item is included in nep-ene, nep-ore and nep-sea
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