Effects of Oil Price and Global Demand Shocks on Small Island Developing States

I employ a global VAR framework for 25 SIDS using annual data over the period 1980 to
2015. A key innovation associated with this research is the use of remittance weights to
capture the close financial linkages between SIDS and advanced economies such as the
US. I find that oil price shocks do not have a statistically significant negative effect on
economic growth in most individual countries and different regions. Economies that are
oil-intensive perform better than their low-intensity counterparts, but economic growth is
likely to be greater if economies transition towards a more diversified energy supply mix.
In terms of a negative demand shock to US GDP, output in SIDS decline more for those
regions that have close economic ties with the US and are within its geographical
proximity. From a policy standpoint, these results highlight the importance of gearing
policy towards energy diversification and designing outward-oriented economic policies
to guard against future oil price shocks.