Abstract
This study is aimed at investigating the asymmetric effect of oil price on inflation for Sub Saharan Africa (SSA) countries. Based on the findings from the dynamic heterogenous nonlinear panel ARDL estimation, a panel data representation of Shin et al. (2014), the long run asymmetric relationship exists between both oil price increase (op+) and decrease (op-) and inflation for these countries. Nevertheless, the oil price increase tends to exert more effect on inflation than the oil price decrease. For policy implication, the monetary authorities shall pay more attention to the increase in oil price than the oil price decrease in designing appropriate policies of price stability as the former exerts greater impact on inflation than the latter. The price stability as one of the key macroeconomic goals could be attained if these countries understand the oil price-inflation relationship and then monetary measures can be adjusted to endure the effect of oil price changes especially increase in oil price on the price level so that stability in the prices of output can be maintained.Keywords: Panel data, inflation, Asymmetry, Sub Saharan AfricaJEL Classifications: C33, E31, E3DOI: https://doi.org/10.32479/ijeep.10764
Highlights
Over the past decades most research has comprehensively emphasized on the relationship between oil price and inflation
The results show a mixture of order integration for the variables, some are stationary at level I(0) while others at first-difference I(1)
All the variables are stationary at first-difference for both trend and intercept under both LLC and IPS tests are significant at 1% level of significance
Summary
Over the past decades most research has comprehensively emphasized on the relationship between oil price and inflation. Higher prices of oil can manifest into exorbitant consumer prices via high cost of production, in which are interpreted as level of inflation (Lacheheb and Sirag, 2019). Frequent fluctuations in oil prices can lead to fluctuations in consumer prices and or inflation, which may exert hindrance towards achieving the set target of macroeconomic policy. Maintenance of inflation and price stability within a specified reasonable set target are important macroeconomic policy objectives every economy wishes to have as it reflects a stable and healthy economy. Price instability raises the cost of doing business by raising inflation risk premia (compensation to investor for the loss of value in the investment) in interest rates thereby leading to fall in investments and output (Nusair, 2019)
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