Abstract
We intended to demonstrate that oil price can have a different passthrough effect into domestic prices at consumer and production levels subject to an oil dependency factor. The results were compared between oil-importing and oil-exporting countries. The nonlinear autoregressive distributed lags (NARDL) models were used to capture the asymmetric pass-through effects of oil price increases and decreases in consumer price and producer price respectively. Our results revealed that oil price changes can have asymmetric effect on consumer price index (CPI) inflation directly and indirectly with more influential impact of indirect effect. This result holds for both groups of countries. The effect on producer price is much larger especially in oil-importing group due to the high dependence of these countries on oil. Oil price changes did lead to increases in consumer prices in oil-importing countries. This may due to effective monetary policy that enhances price stickiness in the economy.
Highlights
Our main objective was to reveal if oil dependency between oil-importing and oil-exporting countries matters in determining the pass-through effects of oil into domestic prices/inflation
We focused the analyses on five main oil-importing and oil-exporting countries, respectively, by extending the mean group (MG), PMG and DFE approaches to the nonlinear autoregressive distributive lags (ARDL) model estimations
Our results revealed significant pass-through asymmetric effect from oil price changes into domestic price inflation that may vary across countries and price levels
Summary
Study of transmission effects of oil price changes into domestic prices provides a better understanding of the dynamic effect of oil shock, and earlier action can be taken to reduce the impacts of such shock. The impacts may translate into second-round effects and wageprice spiral: oil price increases may lead to higher inflation expectations and higher wages due to the first-round effects (the direct and indirect effects); households and labour unions may fight for higher wage rates to compensate for the decline in real income due to higher oil price. This will lead to higher inflation rates
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