The Dynamic Interplay between Oil Rents, Financial Innovation, and Economic Growth in OPEC Countries: Evidence from a Structural VAR Approach

Abstract

This paper analyses the dynamic interaction between oil rents, financial innovation, and economic growth among the OPEC countries on the time series 19802023 based on a Structural Vector AutoRegression (SVAR) model. The unit root test proves that the variables are of I (1) thus integrated, whereas the cointegration Johansen test depicts three long-run relationships of equilibrium which is evidence of steady relationship between oil rents, financial innovation and GDP. The SVAR findings indicate that the oil rent shocks impact on the financial innovation is very positive with cumulative impulse response hitting at 0.215 within the period of 24 periods. Forecast Error Variance Decomposition indicates that, oil rents capture 42.87 percent of the variance in financial innovation within one-year horizon, which demonstrates criticality of resource wealth in financial sector dynamics. The strength of the findings is verified through robustness checks. These findings mean that natural wealth may be used to fuel financial innovation and economic expansion subject to healthy institutions. Resource-dependent economies need, therefore, policy measures targeting on improving governance and developing a financial sector.