An investigation on the impacts of oil price shocks on domestic inflation: A SVAR approach

Abstract

Oil price can have influential effects on inflation as oil is used as the main source in many productions. In this paper, we perform comparative analyses on studying the impacts of oil price shocks on determining the domestic inflation in two groups of countries, i.e. oil importing versus oil exporting countries. In particular, we look into the effects of oil supply and oil demand shocks on determining the domestic inflation. A structural vector autoregressive model is used in analyzing the effects of orthogonalized shocks on inflation. A Blanchard-Quah identification is applied on the long-run impact matrix. We focus the analyses on ten oil importing and ten oil exporting countries respectively. The data ranging from 1973M1 onwards till 2015M1. Our results detect interaction effects among variables. We also observe that oil supply shock is more influential in explaining CPI inflation compared to oil demand shocks. Oil supply shock can be a determinant to inflation in oil importing countries but oil demand has very limited explanatory power on explaining inflation in most countries. Inflation in the main oil exporting countries does not respond to neither oil supply shock nor oil demand shock. The results reveal that oil dependency may determine the magnitude impact of oil supply and oil demand shocks on inflation.