Sources of Macroeconomic Fluctuations in Venezuela

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1. Introduction

Banco Central de Venezuela

Vicepresidencia de Estudios

Oficina de Investigaciones Economicas

Sources of Macroeconomic

Fluctuations in Venezuela

.

Adriana Arreaza

Miguel Dorta*

*. This paper benefited from the comments of the staff at Universidad Alberto

Hurtado, Santiago de Chile, where it was presented on seminar. We are thankful for

the valuable comments received at the IESA seminar by the staff professors. We are

also grateful to Eduardo Zambrano, Juan Nagel, Oswaldo Rodríguez, José Guerra,

Omar Bello, Osmel Mazano and José Gregorio Pineda for their valuable comments.

We also thank Susana Carpio for her competent assistantship.

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Abstract

The aim of this paper is to determine whether macroeconomic fluctuations in Venezuela

can be explained by oil income shocks or by domestic supply or demand shocks. We

conduct an empirical study based on the Blanchard and Quah method, using quarterly

data for the period 1984-2003. We find that domestic shocks seem to explain around

70% of non-oil output growth volatility. In particular, supply shocks seem to be the

main source of non-oil output growth volatility. Nominal shocks, on the other hand,

seem to account for over half of inflation variability. Domestic supply and demand

shocks may be policy related, but with the methodology used in this paper we cannot

determine whether these shocks are the outcome of weak institutions resulting from the

nature of a resource abundant economy, prone to external shocks and a rent-seeking

behavior. But taking such institutions as given, it seems the impact of oil income

fluctuations is limited, although not negligible. These findings are robust to different

specifications.

Resumen

El objetivo de este artículo es determinar las fluctuaciones macroeconómicas en

Venezuela puede ser explicada por choques de los ingresos petroleros o por choques

domésticos de oferta o de demanda. Se realiza para ello un análisis empírico basado en

la metodología de Blanchard y Quah, usando datos trimestrales para el período 1984-

2003. Los resultados indican que los choques domésticos explican al rededor de un 70%

de la volatilidad en el crecimiento del producto no petrolero. En particular, los choques

de oferta, parecen ser la principal fuente de volatilidad en el producto no petrolero,

mientras que los choques nominales podrían explicar más de la mitad de la variabilidad

de la tasa de inflación. Podría pensarse que los choques domésticos están relacionados

con la política económica. Sin embargo, esta metodología no puede determinar si el

comportamiento errático de la política económica es el resultado de un marco

institucional débil que se deriva de la naturaleza de una economía con abundancia de

recursos, propensa a choques externos y a la búsqueda de rentas. Pero si consideramos a

estas instituciones como dadas, parece que el impacto de las fluctuaciones del ingreso

petrolero es limitado, aunque no despreciable. Estos resultados son robustos frente a

diferentes especificaciones del modelo.

JEL: E32, E37, C32

Palabras clave: volatilidad y descomposición de varianza

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Output and inflation volatility in Venezuela are among the highest in Latin America, an

already highly volatile region1. Given that exports are mostly concentrated on oil,

volatility is usually attributed to the exposure of the economy to large external shocks,

due to oil price variability in international markets. The aim of this paper is to examine

to what extent this belief is true. We want to determine whether the variability of nonoil

output growth, inflation and the real exchange rate can be explained by oil income

shocks or by domestic supply or demand shocks. Domestic demand shocks may include

variations in real fiscal expenditure or innovations in the money supply, while supply

shocks can be associated with changes in productivity, labor supply shocks or structural

reform.

Why should we be concerned about volatility? Recent empirical works explore the

connection between volatility and variables that affect welfare. For instance, Ramey and

Ramey (1995) demonstrate the existence of a strong negative link between volatility

and growth in a panel of 92 countries and a subset of OECD countries. Aizenman and

Marion (1993,1999) find a significant inverse relationship between private investment

and macroeconomic uncertainty in developing countries. Gavin and Hausmann (1995),

and Turnovsky and Chattopadhyay (2003) find that volatility of the