Oil rents, diversification and growth: Is there asymmetric dependence? A copula-based inquiry

• Published in: Resources policy 2022-03, Vol.75, p.102495, Article 102495
• Main Authors: Abdalla Alfaki, Ibrahim M., El Anshasy, Amany A.
• Format: Article
• Language: English
• Subjects: Asymmetric dependence; Asymmetry; Banking; Bivariate analysis; Coordination; Copula functions; Dependency; Diversification; Growth; Manufacturing; Microfinance; Oil; Petroleum; Private sector; Rents; Resilience; Service industries; Skewed distributions; Stabilization; UAE; Volatility
• ISSN: 0301-4207; 1873-7641
• DOI: 10.1016/j.resourpol.2021.102495

Not all diversification patterns result in resilient economies. This study investigates the nonlinear dependency structure between oil rents and the non-oil economy in the United Arab Emirates, a significant oil producer. We contribute to the current literature by explicitly modeling nonlinear dependencies in a bivariate and multivariate flexible vine copula framework, with the goal of capturing the asymmetric tail-dependence distributional characteristics. The findings add to the recent policy debate over enhancing economic resilience in highly volatile times. We find strong positive dependencies between oil and the real economy, particularly manufacturing. In contrast, the service sector shows more resilience and output stability amid large oil volatility. Furthermore, the pro-cyclicality of services and manufacturing exhibits asymmetric upper tail dependency pattern, suggesting the prospect of coordinated real output shocks during periods of extreme volatility. This emphasizes the significance of macro-stabilization policy coordination in the face of global and regional shocks. Bank credit has played a significant role in providing liquidity to the private sector amid weak manufacturing sector growth, but not during the downturn in services. As a result, policy priorities should include lowering bank credit barriers in the service industry and strengthening regulatory frameworks to promote microfinance organizations. •Bivariate and c-vine copulas are fit to model tail-dependence between oil rents and the nonoil economy.•UAE Real GDP and manufacturing output are closely tied to oil rents at times of stability.•Oil and services exhibit negative and symmetrical tail-dependence pattern.•Evidence suggests possible coordinated large shocks in real GDP with each of the service and the manufacturing sector.•More bank credit is extended to the private sector at times of slow manufacturing growth but not services.