# **4. Empirical Results Based on Country Groups**

We would like to distinguish between the effects of energy price shocks on current account balances of different country groups within EMDEs. To obtain such results, the Bayesian estimation of models is achieved for each country individually, and the empirical results (of impulse response functions and forecast error variance decompositions) based on 1,000 draws (coming from each country) are pooled together to obtain the results for country groups. As an example, cumulative impulse responses of oil exporters are measured by the median cumulative impulse in the pooled version of 1,000 draws across all oil exporting countries, where we use the methodology introduced by Fry and Pagan (2005, 2011) as detailed above. The empirical results based on the benchmark models are presented in the main text, whereas those based on robustness checks are presented in the Online Appendix.

# **4.1. Real oil price shocks and current account balances**

This subsection is based on cumulative impulse responses of current account balances to real oil price shocks and the contribution of these shocks to the forecast error variance decomposition of current account balances obtained from the models described in Section 3.1.

**Impact of real oil price shocks on current account balances.** Cumulative impulse responses of current account balances (as percentages of GDP) to a 1 percent positive real oil price shock over five years are given in Figure 3. Independent of the model considered, a positive real oil price shock results in a current account surplus in oil exporters, whereas it results in a current account deficit in oil importers. The interquartile ranges (based on the pooled version of 1,000 draws across the relevant countries) support these results. Based on different models, the corresponding magnitudes after five years suggest that 1 percent of a positive real oil price shock results in up to 0.09 percentage points of an improvement in current account balances of oil exporters, whereas it results in up to 0.08 percentage points of a deterioration in current account balances of oil importers.

In order to understand the reasons behind the results in Figure 3, cumulative impulse responses of real GDP (growth) to 1 percent of a positive real oil price shock over five years are given in Figure 4. As is evident, real GDP (growth) of both oil exporters and oil importers reacts positively to an increase in real oil prices, consistent with the trade and financial channels in the case of a positive global demand shock as discussed in Section 2.1 (Kilian, 2009; Kilian et al., 2009). Therefore, a positive real oil price shock acts like a global demand shock, reflected here as a positive oil demand shock. We further investigate this below by distinguishing between oil demand and oil supply shocks. Intuitively, a positive global demand shock increases the demand for oil in all countries, which results in higher exports for oil exporters (and thus positive current account balances) and higher imports for oil importers (and thus negative current account balances).

To better understand the behavior of current account balances in response to oil price shocks, we also examine the association between the impacts on the current account and certain country characteristics. Figure 5 presents the results of the benchmark model for different country groups. As is evident, impulse responses based on median countries are positive (negative) for oil and gas exporters (importers), which is mostly supported by interquartile ranges across countries. However, the impulse responses are negative for both coal exporters and importers. Positive real oil price shocks tend to improve (deteriorate) current account balances of countries with historical current account surpluses (deficits), relatively smaller (larger) service sectors, and relatively less (more) capital-open countries. This is consistent with earlier studies, 11