Mohammad Helmi Hidthiir

OIL PRICE SHOCKS: A COMPARATIVE STUDY ON THE IMPACTS
OF OIL PRICE MOVEMENTS IN MALAYSIA AND THE UK
ECONOMIES

Mohammad Helmi Hidthiir, Mukhriz Izraf Azman Aziz and Wan Roshidah Fadzim
Faculty of Economics
Universiti Utara Malaysia

Abstract
The study investigates the relationship between changes in crude oil prices and Malaysia and the UK macro-economy. A multivariate VAR analysis is carried out among five key macroeconomic variables: real gross domestic product, short term interest rate, real effective exchange rates, long term interest rate and money supply. From the VAR model, the impulse response functions reveal that oil price movements cause significant reduction in aggregate output and increase real exchange rate. The variance decomposition shows that crude oil prices significantly contribute to the variability of real exchange rate long term interest rate in the Malaysia economy while oil price shocks are found to have significant effects on money supply and short term interest rate in the UK economy. Despite these macroeconometric results, caution must be exercised in formulating energy policies since future effects of upcoming oil shocks will not be the same as what happened in the past. Explorations and development of practicable alternatives to imported fuel energy will cushion the economy from the repercussions of oil shocks.
JEL: Q43
Keywords: Oil price fluctuations; Macroeconomic performance, Malaysia, UK

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1. General Overview
The 1974-75 US and global recession was triggered by a tripling of the price of oil following the Yom Kippur war, and by the oil embargo that followed
(refer to Figure 1). The 1980-81 recessions in the US and the rest of the world was also triggered by a spike in the price of oil following the Iranian revolution in 1979. Similarly, the 1990-91 recessions in the US was partly caused by the spike in the price of oil after the Iraqi invasion of Kuwait in the middle of 1990. The surge in prices in 1999-2000 contributed to the

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