Abstract
The oil price – inflation relationship has continued to significantly feature in the macroeconomic debate, a situation that is guaranteed by nineteen oil market disruptions experienced by the world over the last forty years (Verleger, 2019). The debate on the dynamic behavior between oil price and domestic inflation is an ongoing process and recent literature indicated that the relationship shows non-linearities, which could have some implication for monetary policymaking. We estimate NARDL models of the link between oil price and inflation decomposed into CPI sub-indices of food, core, other energy and transport and find support for long-run asymmetry in relation to oil price shocks as well as incomplete pass-through of oil price to inflation. Our results suggest that it takes within 4 - 8 quarters for the disaggregated inflation to converge to its long-run equilibrium after a negative or positive unitary oil price shock. Hence, we conclude that there is the need to boost domestic oil refining capacity and fostering of competition in the domestic market as well as unlocking investment in other bio-fuels and other low-cost energy products to reduce energy imports in Nigeria. Keywords : Oil price shocks, Inflation, NARDL model, Asymmetric pass through, Cointegration JEL Classifications : C12, C22, C32, E31, Q43 DOI: https://doi.org/10.32479/ijeep.8343
Highlights
Oil is generally recognized as “life blood” of the transportation sector and a vital input to the manufacturing sector
This study considered er in the inflation, oil price pass-through model because Nigeria is a small open economy operating under a flexible exchange rate regime, as such, exchange rate dynamics has a significant influence on the macroeconomic variables
The Phillips and Perron (PP) test was employed, and is appropriate as it makes a non-parametric correction to the test statistic
Summary
Oil is generally recognized as “life blood” of the transportation sector and a vital input to the manufacturing sector. This is one pretext why oil price shocks are commonly related to the real economy: domestic output (Mensah et al, 2019; Zhao et al, 2016) and prices (Abu-Bakar and Masih, 2018; Afees, 2017; Narayan et al.,1 2019; Kilian and Xiaoqing, 2019). On the basic question about improving the empirical results on the oil price - inflation nexus in particular, some researchers (e.g., Syed, 2018) argued that looking more at the nature of price shocks can produce a better conclusive result. While Kilian (2009) decomposed oil price data into global crude oil supply shock, global industrial commodities demand shock, and crude oil related global demand shock to examine
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