Oil Price and Consumer Price Nexus in South Africa Revisited: A Novel Asymmetric Causality Approach

Abstract

The relationship between oil and the price level has always garnered the attention from policy makers and researchers. Periods of high oil price volatility is thought to induce negative repercussions for domestic price levels in an oil importing country. Research in the past has revealed that there exists an asymmetric component in the causal relationship between oil prices and consumer prices. To this end, we opt for a novel asymmetric causality test developed by Hatemi-J (2012) to explore the relationship between international oil prices and the price level in South Africa for a period that runs from 1921: M02 to 2013: M10. This method disentangles the effects of positive shocks from negatives ones allowing to test for an asymmetric relationship. Our evidence are in favour of a causal relationship that runs from oil prices to the price level, but this relationship is observed only for the short term since there is no long run cointegrating relationship. The asymmetric tests reveal that both a positive and negative oil price shock leads to a positive price level shock, however the evidence in favour of a negative oil price shock is stronger.