Asymmetric Impacts of Oil Price on Inflation: An Empirical Study of African OPEC Member Countries

Umar Bala,Lee Chin

doi:10.3390/en11113017

Abstract

This study investigates the asymmetric impacts of oil price changes on inflation in Algeria, Angola, Libya, and Nigeria. Three different kinds of oil price data were applied in this study: the actual spot oil price of individual countries, the OPEC reference basket oil price, and an average of the Brent, WTI, and Dubai oil price. Autoregressive distributed lag (ARDL) dynamic panels were used to estimate the short- and long-term impacts. Also, we partitioned the oil price into positive and negative changes to capture asymmetric impacts and found that both the positive and negative oil price changes positively influenced inflation. However, the impact was found to be more significant when the oil prices dropped. We also found that the money supply, the exchange rate, and the gross domestic product (GDP) are positively related to inflation, while food production is negatively related to inflation. Accordingly, policy-makers should be cautious when formulating policies between the positive and negative changes in oil prices, as it was shown that inflation increased when the oil price dropped. Additionally, the use of a contractionary monetary policy would help to reduce the inflation rate. Lastly, we suggest that the government should encourage domestic food production, both in quantity and quality, to reduce inflation.

Highlights

During the 1970s, economies around the world experienced increasing inflation rates that were followed by a rapid rise in international crude oil prices
The results reveal that the null hypothesis cannot be rejected at the level form for the consumer price index (CPI), food production index (FPI), and gross domestic product (GDP) variables
This study aimed to examine the impact of oil price changes on inflation in African OPEC

Summary

Introduction

During the 1970s, economies around the world experienced increasing inflation rates that were followed by a rapid rise in international crude oil prices. Despite the higher price for crude oil during the 2000s, this observation, in this case, suggests that inflation was lower in many countries when compared with the rising oil prices and inflation that were experienced during the 1970s [2]. The rise and decline in crude oil prices during the periods of inflation in 1970 and 1980 were quickly adjusted. More recently, there has been little evidence to suggest that changes in crude oil price influence inflation [3]. Falling oil prices weakened the overall foreign earnings of the African oil-producing countries, resulting in rising inflation rates given the demand for foreign offshore products; demand did not fall for food items. African countries are classified as food-insecure countries [4]

Objectives

Results

Conclusion