Abstract
Previous studies have evident the effects of oil price changes on domestic inflation. However, such effects may vary due to oil dependency factor. This paper extends the examination on two panel groups, namely the oil importing and oil exporting countries. Each group consists of ten countries. Besides, we also compare the relative effects of oil price with other shocks (domestic output, exporter's production cost and real exchange rate) on domestic inflation (consumer price and producer price). Our results capture significant pass-through effect from oil price changes on domestic inflation at producer and consumer levels. However, oil price is not the main determinant to domestic inflation. The oil price pass-through effect differs between oil importing versus oil exporting groups across consumer and producer levels. Higher oil price causes to higher production price inflation but does not lead to higher consumer price inflation in both groups of countries. The oil price effect together with exchange rate, foreign cost production and GDP have significant long-run impact on domestic inflation in both groups of countries. The joint effects are small and not significant in the short-run. Oil dependency and effective monetary policy matter on determining the effect of oil price changes on domestic inflation.
Highlights
Oil price changes may have crucial effect on household spending, production activities and economic performance at national and international levels
The pooled mean group (PMG) technique is applied on estimating the consumer and producer price inflation equations
Our results show that oil price pass-through has long-run significant effect on domestic inflation in both groups of countries
Summary
Oil price changes may have crucial effect on household spending, production activities and economic performance at national and international levels. The impacts of oil price changes may vary across economies especially between oil importing versus oil exporting countries as these countries show very different dependency on oil. Our main objective is to compare the oil pass-through effect on domestic inflation at producer and consumer levels respectively. We conduct relative comparison between the effects of oil price changes and other macroeconomic factors on determining the inflation in these two groups of countries. Oil price changes can have significant effect but the effect is different at consumer versus producer levels and distinguishable between oil importing versus oil exporting countries. Oil Price Pass-through on Domestic Inflation four explains the data and methodology respectively; section five interprets the results and the last section concludes
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