Oil price volatility and industrial output growth in East Asia-Pacific developing economies: evidence from a two-stage panel GARCH framework

This study examines how oil price volatility affects industrial output growth in selected East Asia-Pacific developing economies. Given the continued importance of oil in production, transport, and broader industrial activity, understanding this relationship remains relevant for both policymakers and industrial planners. The study uses monthly data from January 2008 to December 2025 for six East Asia-Pacific developing economies. In the first stage, Brent oil price volatility is estimated from the common monthly oil-return series using GARCH-type models. In the second stage, the fitted volatility measures are introduced into a country-level panel model of industrial output growth. The main estimates are obtained using fixed effects with Driscoll–Kraay standard errors. DCC and cDCC models are used as supplementary evidence to describe the time-varying correlation between oil returns and regional industrial output growth. The results show that oil price volatility has a negative and statistically significant effect on industrial output growth. This finding is robust across the baseline GARCH specification and alternative GJR-GARCH, EGARCH, and HYGARCH volatility measures. The asymmetric results further show that industrial output growth responds negatively under both positive and negative oil-volatility regimes. However, the difference between the two regimes is not statistically significant. This suggests that oil price volatility exerts a broadly contractionary effect on industrial output growth, but the evidence does not support strong asymmetry. Additional robustness checks, including the exclusion of the COVID-19 period, do not alter the main conclusion. The study contributes to the literature in three ways. First, it focuses directly on industrial output growth rather than broader macroeconomic aggregates or financial market indicators. Second, it distinguishes clearly between oil returns and oil price volatility by estimating volatility in a first stage and then linking the fitted measure to industrial performance in a second-stage panel model. Third, it provides evidence for East Asia-Pacific developing economies, where evidence on the oil volatility and industrial output nexus remains limited.

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