Dissecting Global Oil Shocks: Implications for Taiwan’s Output, Inflation, and External Sector

Abstract

This investigation evaluates how fluctuations in international petroleum prices reverberate through the Taiwan macroeconomy over the period January 2001 to September 2023. Monthly observations are assembled for a representative set of indicators, including industrial output, consumer price inflation, central-bank policy interest rates, broad money supply, nominal exchange rates, merchandise imports, merchandise exports, and outward foreign direct investment. To disentangle structural shocks, the analysis decomposes oil-price movements into supply disturbances, global aggregate demand shifts, and oil-specific demand innovations, then traces their dynamic effects by means of a structural vector autoregression framework augmented with appropriate identification restrictions. Empirical estimates reveal that supply-side disruptions in the crude-oil market exert only muted and transitory influences on domestic activity, prices, and external balances. By contrast, shocks arising from worldwide demand expansions and from precautionary or speculative changes in oil-market expectations transmit swiftly to Taiwan variables, generating pronounced increases in industrial production, consumer prices, and policy interest rates, while simultaneously depreciating the won and widening both import and outward investment flows. These differential responses underscore the openness of the Taiwan economy and its sensitivity to global demand conditions rather than to pure supply constraints. The evidence therefore suggests that policy authorities should prioritise strategies that harness buoyant external demand, through diversification of export markets and support for high-value manufacturing, while maintaining vigilant monetary and exchange-rate policies to cushion inflationary pressures stemming from oil-specific demand surges. Future research could incorporate sectoral disaggregation to refine policy recommendations and anticipate evolving energy-market dynamics more effectively.