Oil Revenue Absorption and Macroeconomic Vulnerability: Evidence from a DSGE Model of a Small Open Oil-Exporting Economy

Oil-exporting economies are notoriously sensitive to external shocks, but the importance of current oil revenue absorption for macroeconomic shock transmission has not been explored thoroughly. This paper constructs a stylized DSGE model to analyze how macroeconomic shock propagation differs under alternative degrees of current oil revenue absorption. The model combines calibration to resemble Kazakhstan with Bayesian estimation. Six absorption rates are chosen that form three pairwise comparisons: 10% vs. 90%, 20% vs. 80%, and 40% vs. 60%. The model is analyzed under external oil demand, oil price, foreign output, total factor productivity, labor preference, and monetary policy shocks. Simulation impulse responses indicate that increased current absorption dramatically magnifies shocks that impact oil export income directly. External oil demand and oil price shocks exhibit strong responsiveness to changes in the absorption rate, while impulse responses to productivity, labor preference, monetary policy, and foreign output shocks display relatively little sensitivity to the absorption regime. For example, under the 10–90% comparison, the first period output response to an external oil demand shock increases from 3.195 to 19.481, while associated responses to a productivity shock cluster closely together with uncertainty bands that overlap extensively. Intermediate absorption comparisons maintain the same shock-specific conclusion while differences between regimes diminish as absorption rates get closer. This evidence suggests that the macroeconomic vulnerability of oil-exporting economies is a function not only of whether a shock is external, but also if it affects oil export income and has the capacity to interact with the oil revenue smoothing mechanism. These results lend support to intertemporal smoothing as a possible method to alleviate oil-income shock exposure in the short-run, but do not suggest an optimal level of current absorption.