Asymmetric Impacts of Oil Price on Inflation: An Empirical Study of African OPEC Member Countries

Abstract

This study investigates the asymmetric impacts of oil price changes on inflation in Algeria, Angola, Libya and Nigeria. Three different oil price data were applied in this study; the specific spot oil price of individual countries, the OPEC reference basket oil price and an average of the Brent, WTI and Dubai oil price. The dynamic panels ARDL were used to estimate the short and the long-run impacts. Also, this study partitioned the oil price into positive and negative changes to capture asymmetric impacts and found both positive and negative oil price changes positively influenced inflation. However, the impact was found to be more significant when oil prices dropped. The results from the study also found that money supply, the exchange rate and GDP are positively related to inflation while food production is negatively related to inflation. Accordingly, policymakers should be cautious in formulating policies between the positive and negative changes in oil prices as it was shown that inflation increased when the oil price dropped. Additionally, the use of contractionary monetary policy would help to reduce the inflation rate, and lastly, it is proposed that the government should encourage domestic food production both in quantity and quality to reduce inflation.

Asymmetric Impact of Oil Price on Inflation in Nigeria

“…Higher oil prices impact the economy in a number of ways: transfer of income from oil importing economies to oil exporters; rise in the cost of production of goods and services in an economy emanating from an upsurge in the relative price of energy inputs; it impacts on the price level; decline in economy's productive capacity as producers respond to higher oil prices by reducing their utilization of both oil and capital; and uncertainty in investment decisions by households and firms owing to uncertain oil prices in the future. Others include direct and indirect impacts on financial markets and the incentive for providers of energy to increase production and investment (Fried & Schultze, 1975;Marquez, 1986;Blanchard & Gali, 2007;DePratto et al, 2009;Bataa, 2010;Alvarez et al, 2011;Trang et al, 2017;Bala & Chin, 2018). The magnitude and direction of its impact, however, differ between industrial and developing countries as well as between oil producing and consuming economies (IMF, 2000).…”

“…The study found, among others, that oil price hikes induced a 43 percent increase in inflation in a year, while a fall in oil prices leads to a 29 percent increase in inflation. Bala and Chin (2018) estimates the asymmetric impacts of oil price shocks on inflation in four African oil producing countries -Algeria, Angola, Libya and Nigeria using the ARDL dynamic panels framework. The study discovered that both positive and negative oil price shocks positively influence inflation in these countries during the period, but the impact was more pronounced in periods of oil price declines.…”

“…Positive oil price shocks have the tendency to increase money supply in oil producing countries (Oyeyemi, 2013;Omolade, Ngalawa & Kutu, 2019) with profound implications on consumer prices. Also, falling oil prices weaken the foreign earnings of oil producing countries resulting in currency depreciation and rising inflation (Bala & Chin, 2018). Thus, oil price shocks, whether positive or negative, have profound implications on consumer prices in oil producing countries including Nigeria.…”

“…Consequently, it would be inappropriate to presume that the behaviour of inflation in response to oil price shocks is symmetric (Omolade et al 2019). Empirical works including Kelikume (2017), Bala and Chin (2018) and Omolade et al (2019) address this problem by adopting asymmetric approaches to examine the impact of oil price shocks on aggregate inflation in Africa's oil producing countries including Nigeria. In this study, we also examine the impact of oil price shocks on consumer price inflation in Nigeria.…”

Oil Price Shocks and Macroeconomic Performance of the Nigerian Economy: A Structural Var Approach

“…The study concluded that an oil price shock causes inflation index to rise while oil price uncertainty has no effect on the increase in inflation. Bala & Chin (2018) investigated the asymmetric effect of oil price shocks on inflation in small oil exporting economies like Nigeria, Libya, Algeria and Angola. Utilising the NARDL dynamic panels, they observed that both the positive and negative oil price changes affected the level of inflation.…”