A Comparative Study on the Effects of Oil Price Changes on Inflation

Abstract

In this study, empirical analyses are performed to study the effects of oil price changes on inflation in two groups of countries, namely the high versus low oil dependency groups. In addition, we also compare the relative effect of oil price with other types of shocks such as real exchange rate, domestic output and exporters’ production cost. We model the pass-through equation in an autoregressive distributed lag (ARDL) format and the model is estimated using pooled mean group method. Our results reveal that oil price change has its direct effect on domestic inflation in low oil dependency group but its impact is indirect on affecting the domestic inflation in the high oil dependency group through changes on the exporter's production cost. The main determinants of domestic inflation are real exchange rate and exporter's production cost (high oil dependency group) and domestic output and exporter's production cost (low oil dependency group). We suggest the policymaker to stabilize the effects of these shocks through monetary policy accommodate.

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