Oil price shocks and business sentiment: evidence from South Korea

This study examines the impact of structural oil price shocks on business sentiment in South Korea, focusing on the moderating role of macroeconomic uncertainty. Based on the Bayesian SVAR framework suggested by Baumeister and Hamilton (2019), I decompose oil price movements into four structural shocks and analyse their effects on business sentiment using local projection methods. The results reveal significant heterogeneity in response to structural oil shocks: while supply shocks exert contractionary effects, economic activity shocks induce persistent improvements in sentiment. Crucially, these dynamics are regime-dependent: high uncertainty amplifies the adverse impact of supply-side shocks and attenuates the positive effects of demand-side shocks. These transmission mechanisms operate primarily through corporate perceptions of business conditions and sales. The findings imply that stabilization measures should target supply-driven rather than demand-driven increases, and that reducing uncertainty is central to safeguarding corporate confidence in energy-dependent economies.