# Liquidity Creation, Oil Term of Trade Shocks, and Growth Volatility in Middle Eastern and North African Countries (MENA)

^{1}

^{2}

^{3}

^{*}

## Abstract

**:**

## 1. Introduction

## 2. Finance and Volatility: A Review of Empirical Studies

## 3. Data and Methodology

_{t}is the average annual price of oil between 2000 and 2019, MUV

_{t}is the manufacturing unit value index, and X

_{i}and M

_{i}are the average percentages of oil exports and imports to GDP in country i between 2000 and 2019. Instead of being fixed, similar to the “All Primary Commodities Index” that is used by the International Monetary Fund (IMF), this index allows the country’s exposure to oil price fluctuations to fluctuate with the composition of its oil export and import basket. The index for the growth of oil’s trading terms was determined using Equation (1) as follows:

_{i}− M

_{i}).

_{1}, β

_{2}, β

_{3}, β

_{4}, and β

_{5}refer to the long-term coefficients for control variables. Additionally, ${\gamma}_{1}$, ${\gamma}_{2}$ …, ${\gamma}_{8}$ are the short-term coefficients of the lagged dependent regressors. Furthermore, the ${\varnothing}_{0}=-(1-{\delta}_{i})$ group, which was specified as the speed adjustment coefficient and is expected that ${\varnothing}_{0}$ is less than zero (${\varnothing}_{0}<0)$. Finally, the subscript i and t represent country and time, respectively, and ${\mu}_{it}$ is the error term.

## 4. Empirical Results

#### 4.1. Descriptive and Correlation Analyses

#### 4.2. Panel Cointegration

#### 4.3. Main Empirical Analyses and Discussion

#### 4.4. Robustness Check

## 5. Conclusions

## Author Contributions

## Funding

## Data Availability Statement

## Conflicts of Interest

## Notes

1 | Our sample was based on information from the following countries: Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, and the United Arab Emirates. |

2 | To classify activities and weights, see Almeshari et al. (2023). |

3 | We performed a three-panel unit root test—as per Im et al. (2003); Levin et al. (2002); and Pesaran’s second generation of IPS test (CIPS) (Pesaran 2007) the results revealed that all variables are integrated of I(1). The findings are available upon request; we have not included them here due to their length. |

4 | Further explanation can be found at: https://datahelpdesk.worldbank.org/knowledgebase/articles/378834-how-does-the-world-bank-classify-countries (accessed on 3 April 2023). |

5 | We appreciate an anonymous referee proposing this check. |

6 | We appreciate an anonymous referee who proposed this check. |

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Variable | Mean | Std. Dev. | Coefficient of Variation (CV) | Min | Max |
---|---|---|---|---|---|

GDPPC Volatility | 8.174 | 1.42 | 0.17372 | −5.832 | 13.438 |

LCPC in log | 9.841 | 2.562 | 0.260339 | 5.594 | 18.12 |

REAL SHOCK | 0.286 | 3.336 | 11.66434 | −7.131 | 5.801 |

Monetary SHOCK | 1.014 | 1.607 | 1.584813 | −5.915 | 4.979 |

LC*REAL_SHOCK | 167.17 | 336.735 | 2.014315 | 0.007 | 2446.179 |

LC*MONETARY SHOCK | 70.554 | 151.593 | 2.14861 | 0 | 1426.879 |

TO in log | 4.523 | 0.339 | 0.07495 | 3.409 | 5.257 |

EXP in log | 2.808 | 0.301 | 0.107194 | 1.907 | 3.401 |

Variables | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) |
---|---|---|---|---|---|---|---|---|

(1) GDP_PC Volatility | 1.000 | |||||||

(2) LCPC in log | 0.339 * | 1.000 | ||||||

(3) REAL SHOCK | 0.709 * | −0.387 * | 1.000 | |||||

(4) MONETARY SHOCK | 0.113 * | −0.079 * | −0.163 * | 1.000 | ||||

(5) LC*REAL_SHOCK | −0.148 | −0.162 | 0.554 | −0.150 | 1.000 | |||

(6) LC*MONETARY SHOCK | 0.123 * | −0.050 | −0.139 | 0.618 | −0.101 | 1.000 | ||

(7) TO in log | −0.071 * | 0.136 * | 0.197 | −0.149 | 0.294 | −0.097 | 1.000 | |

(8) EXP in log | 0.272 * | 0.154 | −0.140 | −0.367 | −0.001 | −0.267 | −0.128 | 1.000 |

Approach | Panel Cointegration Tests | Statistics | p-Values |
---|---|---|---|

Pedroni: Common AR coefficients (within dimension) | Panel-v | −2.575556 | 0.9950 |

Panel-rho | 3.493393 | 0.9998 | |

Panel-PP | −3.617759 | 0.0002 * | |

Panel-ADF | −12.80074 | 0.0000 * | |

Pedroni: Individual AR coefficients (between dimension) | Group-rho | 3.878982 | 0.9999 |

Group-PP | −6.251401 | 0.0000 * | |

Group-ADF | −5.865543 | 0.0000 * | |

Kao | 2.50695 | 0.0061 * |

Dependent Variable: Growth Volatility | ||
---|---|---|

Estimators | PMG | MG |

Long term coefficients: | ||

Variables | ||

Real Shock | 0.424 (3.690) * | 12.944 (1.020) ** |

Monetary shock | 0.060 (0.660) ** | 2.902 (01.150) *** |

Liquidity Creation (LC) | −0.175 (−5.680) * | −0.354 (−0.950) *** |

(LC*real Shock) | −0.003 (−4.830) * | −0.391 (−0850) *** |

(LC*Monetary Shock) | 0.002 (2.990) * | 0.002 (2.990) *** |

Trade Openness (TO) | 0.939 (2.010) ** | 10.335 (0.870) |

Expenditure (EXP) | 2.888 (5.030) * | 1.307 (1.020) |

Error correction term | −0.474 (−2.270) ** | −0.270 (−5.300) * |

Short term coefficients: | ||

Δ Real Shock | 3.198 (1.110) ** | 0.247 (0.090) *** |

Δ Monetary Shock | 0.437 (0.830) *** | 3.224 (0.900) |

Δ Liquidity Creation (LC) | −0.336 (−1.280) | −0.446 (−0.580) |

Δ (LC*real Shock) | −7.142 (−1.020) ** | −5.992 (−1.040) |

Δ (LC*Monetary Shock) | 0.042 (0.930) *** | 0.256 (1.100) |

Δ Trade Openness (TO) | 0.535 (0.330) | 0.693 (0.180) |

Δ Expenditure (EXP) | 3.329 (2.390) ** | 0.711 (0.170) |

Intercept | −4.662 (−2.080) ** | −10.433 (−0.670) ** |

Diagnostics: | ||

Hausman test (χ^{2}) | 0.172 | |

p-value | 0.973 | |

Number of countries | 10 | 10 |

Number of observations | 167 | 167 |

Dependent Variable Volatility | |

Variables | |

lagged. volatility | 0.237 * (0.066) |

Real Shock | 0. 936 * (0.260) |

Monetary Shock | 0.014 ** (0.005) |

Liquidity Creation (LC) | −0.135 ** (0.058) |

(LC*real Shock) | −0.007 * (0.002) |

(LC*Monetary Shock) | 0.021 * (0.008) |

Trade Openness (TO) | 0.750 * (0.444) |

Expenditure (EXP) | 2.690 * (0.351) |

Constant | −2.463 (0.494) |

Diagnostics: | |

Number of cross groups | 93 |

Number of instruments | 27 |

AR(2) p-value | 0.753 |

Sargan tests p-value | 0.381 |

Countrys-pecific effects | YES |

Time-period effect | YES |

Dependent Variable: Growth Volatility | ||

Countries Based on Income | HIC | MIC |

Estimators | PMG | PMG |

Long term coefficients: | ||

Variables | ||

Real Shock | 0.349 (0.063) * | 0.173 (0.158) |

Monetary Shock | 0.038 (0.092) | 0.169 (0.123) |

Liquidity Creation (LC) | −0.269 (0.063) * | −0.013 (0.142) ** |

(LC*real Shock) | −0.004 (0.001) * | −0.007 (0.003) *** |

(LC*Monetary Shock) | 0.002 (0.001) * | 0.009 (0.006) |

Trade Openness (TO) | −3.501(1.292) *** | −1.983 (1.094) *** |

Expenditure (EXP) | 3.370 (1.222) * | 5.133(1.365) * |

Error correction term | −0.548 (0.196) * | −0.264 (0.502) * |

Short term coefficients: | ||

Δ Real Shock | 0.430 (0.528) ** | 6.581 (7.264) *** |

Δ Monetary Shock | 0.113 (0.201) *** | 1.278 (1.380) |

Δ Liquidity Creation (LC) | −0.273 (0.208) ** | −0.153 (0.147) ** |

Δ (LC*real Shock) | −11.773 (11.663) ** | −0.795 (0.447) |

Δ (LC*Monetary Shock) | 0.010 (0.015) ** | 0.074 (0.068) |

Δ Trade Openness (TO) | −1.011 (2.348) | −1.141 (3.119) |

Δ Expenditure (EXP) | 3.454 (2.423) | 5.294 (3.827) |

Intercept | 1.341 (0.646) ** | −4.039 (7.928) ** |

Number of countries | 6 | 4 |

Number of observations | 101 | 66 |

Long Term Coefficients: | |

variables | |

Real Shock | 0.791 (0.038) * |

Monetary Shock | −0.082 (0.066) |

Liquidity Creation (LC) | −0.355 (0.038) * |

(LC*real Shock) | −0.005 (0.001) * |

(LC*Monetary Shock) | 0.002 (0.000) * |

Trade Openness (TO) | −1.127 (09782) * |

Expenditure (EXP) | 4.068 (0.518) * |

Labour Force (LF) | −0.719 (0.173) * |

Error correction term | −0.389 (0.228) * |

Short Term Coefficients: | |

Δ Real Shock | 3.147 (2.974) |

Δ Monetary Shock | 0.729 (0.614) |

Δ Liquidity Creation (LC) | −0.300 (0.326) |

Δ (LC*real Shock) | −8.587 (8.266) |

Δ (LC*Monetary Shock) | 0.034 (0.044) |

Δ Trade Openness (TO) | −1.312 (1.666) |

Δ Expenditure (EXP) | 4.750 (1.666) |

Labour Force (LF) | −6.977 (10.289) |

Intercept | −7.501 (5.119) |

Number of countries | 10 |

Number of observations | 167 |

Dependent Variable: Growth Volatility | |

Long term coefficients: | |

Variables | |

Real Shock | 0.424 (0.031) * |

Monetary Shock | 0.060 (0.090) |

Liquidity Creation (LC) | −0.175 (0.031) * |

(LC*real Shock) | −0.003 (0.001) * |

(LC*Monetary Shock) | 0.002 (0.001) * |

Trade Openness (TO) | −0.939 (0.467) ** |

Expenditure (EXP) | 2.888 (0.575) * |

Error correction term | −0.474 (0.209) ** |

Short term coefficients: | |

Δ Real Shock | 2.998 (2.916) |

Δ Monetary Shock | −0.465 (0.522) |

Δ Liquidity Creation (LC) | 0.419 (0.246) *** |

Δ (LC*real Shock) | −7.141 (6.979) |

Δ (LC*Monetary Shock) | 0.041 (0.045) |

Δ Trade Openness (TO) | −0.090 (1.520) |

Δ Expenditure (EXP) | 1.960 (1.371) |

Intercept | −4.662 (2.245) ** |

Number of countries | 10 |

Number of observations | 167 |

Long Term Coefficients: | |

Variables | |

Real Shock | 0.276 (0.075) * |

Monetary Shock | 0.070 (0.017) *** |

Liquidity Creation (LC) | −0.261 (0.025) * |

(LC*real Shock) | −0.002 (0.000) ** |

(LC*Monetary Shock) | 0.002 (0.000) * |

Trade Openness (TO) | −3.893 (0.406) * |

Expenditure (EXP) | 3.328 (0.638) * |

STOCK | 0.005 (0.008) |

Error correction term | −0.422 (0.167) ** |

Short Term Coefficients: | |

Δ Real Shock | 2.931 (2.775) *** |

Δ Monetary Shock | 0.181 (0.388) |

Δ Liquidity Creation (LC) | −0.534 (0.312) *** |

Δ (LC*real Shock) | −7.259 (7.232) |

Δ (LC*Monetary Shock) | 0.034 (0.044) |

Δ Trade Openness (TO) | −0.527 (1.551) |

Δ Expenditure (EXP) | 3.598 (1.411) *** |

Δ STOCK | −0.011 (0.015) |

Intercept | 1.413 (0.712) ** |

Number of countries | 10 |

Number of observations | 167 |

**Table 10.**Liquidity creation, shocks, and volatility using the shift in the policy rate set by the central bank as a proxy for monetary shock.

Dependent Variable: Growth Volatility | |

Estimator | PMG |

Long term coefficients: | |

variables | |

Real Shock | 0.132 (0.102) * |

MonetaryShock | 4.286 (1.995) ** |

Liquidity Creation (LC) | −1.445 (0.852) *** |

(LC*real Shock) | −0.334 (0.000) ** |

(LC*MonetaryShock) | 0.074 (0.032) ** |

Trade Openness (TO) | 1.024 (0.396) ** |

Expenditure (EXP) | −0.170 (0.177) |

Error correction term | −0.652 (0.286) ** |

Short term coefficients: | |

Δ Real Shock | 6.790 (2.234 * |

Δ MonetaryShock | 0.536 (0.229) ** |

Δ Liquidity Creation (LC) | −0.268 (0.123) ** |

Δ (LC*real Shock) | −0.455 (0.218) ** |

Δ (LC*MonetaryShock) | 0.059 (0.583) |

Δ Trade Openness (TO) | −0.002 (0.070) * |

Δ Expenditure (EXP) | 0.795 (1.611) |

Intercept | −4.430 (1.991) ** |

Number of countries | 10 |

Number of observations | 167 |

Dependent Variable: Growth Volatility | |

Estimator | PMG |

Long term coefficients: | |

variables | |

Real Shock | 0.663 (0.102) * |

Monetary Shock | 0.478 (0.104) * |

Liquidity Creation (LC) | −1.171 (0.195) * |

(LC*real Shock) | −0.011 (0.002) * |

(LC*Monetary Shock) | 0.194 (0.003) * |

Trade Openness (TO) | −1.491 (0.323) ** |

Expenditure (EXP) | −1.486 (0.308) * |

Error correction term | −0.598 (0.141) ** |

Short term coefficients: | |

Δ Real Shock | 14.450 (13.367) |

Δ Monetary Shock | 0.127 (0.244) |

Δ Liquidity Creation (LC) | −0.486 (1.527) |

Δ (LC*real Shock) | −2.110 (1.020) * |

Δ (LC*Monetary Shock) | 0.225 (0.119) *** |

Δ Trade Openness (TO) | −0.549 (1.226) |

Δ Expenditure (EXP) | 0.392 (0.165) ** |

Intercept | −4.662 (−2.080) ** |

Number of countries | 10 |

Number of observations | 167 |

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## Share and Cite

**MDPI and ACS Style**

Almeshari, A.; Bin Dato Haji Yahya, M.H.; Kamarudin, F.B.; Ali, R.; Abd Hamid, S.
Liquidity Creation, Oil Term of Trade Shocks, and Growth Volatility in Middle Eastern and North African Countries (MENA). *Economies* **2023**, *11*, 147.
https://doi.org/10.3390/economies11050147

**AMA Style**

Almeshari A, Bin Dato Haji Yahya MH, Kamarudin FB, Ali R, Abd Hamid S.
Liquidity Creation, Oil Term of Trade Shocks, and Growth Volatility in Middle Eastern and North African Countries (MENA). *Economies*. 2023; 11(5):147.
https://doi.org/10.3390/economies11050147

**Chicago/Turabian Style**

Almeshari, Ali, Mohamed Hisham Bin Dato Haji Yahya, Fakarudin Bin Kamarudin, Rosalan Ali, and Sha’ari Abd Hamid.
2023. "Liquidity Creation, Oil Term of Trade Shocks, and Growth Volatility in Middle Eastern and North African Countries (MENA)" *Economies* 11, no. 5: 147.
https://doi.org/10.3390/economies11050147