THE VOLATILITY OF AZERBAIJAN’S BUSINESS CYCLES AND THE ROLE OF MONETARY POLICY SHOCKS

Abstract

This article analyzes the volatility of Azerbaijan's total GDP, oil-gas GDP, and non-oil-gas GDP over decades and evaluates the role of monetary policy shocks in the volatility of non-oil-gas GDP. During the oil boom period in the mid-2000s, volatility was high in both total and oil-gas GDP, but the stabilization of production in the 2010s led to a decrease in this volatility. Conversely, the volatility of non-oil-gas GDP increased during that period. In the early 2020s, renewed increases in volatility in oil-gas production led to a rise in the volatility of total and oil-gas GDP. Nevertheless, a decreasing trend in volatility is observed against the backdrop of efforts to diversify the economy. The volatility of monetary policy shocks peaked in the 2010s, especially around the 2015 devaluation, but stabilized following reforms in the subsequent period and fell to a historic minimum level in the 2020s. However, variance decomposition shows that the impact of monetary policy shocks on the volatility of non-oil-gas GDP is limited. This result indicates that fiscal policy, labor productivity, structural changes in the economy, improvements in the management of working capital, financial innovations, or external factors play a more important role in the volatility of the non-oil-gas sector.