The nonlinear and asymetric pass‐through effect of crude oil prices on inflation

Abstract

AbstractThis paper examines pass‐through of crude oil prices on consumer prices index (CPI) and producer prices index (PPI) in Turkey in the augmented Phillips curve context by applying ARDL (autoregressive distributed lag) and NARDL (non‐linear ARDL) models. The results show that the effects of volatility in crude oil prices to Turkey’s consumer price index and producer prices index are not symmetrical in the long run. The long‐term effects of the increase in international oil prices consumer price index and producer prices index are higher than the case where international oil prices show reduction. When compared to ARDL model, NARDL model reveals more significant results that are required to consider the asymmetry effect of international oil prices to consumer price index. Moreover, if crude oil prices rise, both indices are affected differently. Therefore, economic authorities in Turkey should adopt different density monetary policy efforts to respond the rise and fall of global oil prices. Focusing on further loosening the control of oil prices and reducing the cartel valuing power of oil enterprises are among the options together with implementing long‐term policies that encourage renewable energy sources.