The role of monetary transmission channels in transmitting oil price shocks to prices in ASEAN-4 countries during pre- and post-global financial crisis

Abstract

This paper examines the vulnerability of domestic prices against oil price shocks by considering the direct and indirect effects of oil price on consumer price index, which occur through the known channels of the monetary transmission mechanism. We consider interest rate, exchange rate, domestic credit, and share price during the periods before and after the global crisis of 2007-2009 in the ASEAN-4 (Association of Southeast Asian Nations-Indonesia, Malaysia, the Philippines and Thailand) countries. Using the structural vector auto regression model and monthly data (2002 month 1-2013 month 4), the results indicate that pre-crisis-with the exception of Indonesia, which is not much influenced by oil pricesthere is no indirect influence, but there is a considerable direct effect of oil price on consumer price index for all countries. Post-crisis, the oil price transmits strongly to consumer price index indirectly, although the direct effect of oil price on consumer price index is still extensive. Policymakers can target domestic prices via share prices and exchange rates.

Oil Price Pass-Through Into Consumer and Producer Prices With Monetary Policy in China: Are There Non-linear and Mediating Effects

“…The primary aim of monetary policy is to stabilize consumer prices and further improve GDP growth; thus, the changing role of oil price with monetary policy in China could provide evidence for monitoring oil shocks at the macroeconomic level. In this vein, the evidence confirmed that monetary policy may be an accurate tool for capturing the pass-through of oil prices to consumer/producer prices (Razmi et al, 2016;Alvarez and Sanchez, 2019;Wen et al, 2019a). Overall, these results, combined with Figure 2, indicated that the pass-through of oil prices, coupled with a monetary policy, is indeed informative regarding consumer and producer prices.…”

“…First, we provide evidence for the mediating effect of financial markets, then we document the effect of the government debt channel on the oil price-consumer/producer price mechanism. Given the significant changes that have occurred in the financial and oil markets in last two decades, it was desirable to analyze the existence of a channel mechanism in the links between oil price movements and consumer/produce price levels (Alvarez et al, 2011;Razmi et al, 2016;Sek, 2019). To do this, this study used a causal steps approach to explore the mediating effect (Li et al, 2019c).…”

“…The pass-through effect of the oil price occurs via two indirect channels: financial markets and government debt. First, the fluctuation of oil prices could affect future stock prices, thereby impacting consumer/producer prices, since financial markets can be an important determinant of domestic economies (Razmi et al, 2016;Ji et al, 2018;Wen et al, 2019c;Zheng and Du, 2019). The link between oil price movements and financial markets has important implications for portfolio management, so the financial market channel was considered in this study (Arouri, 2011;Cong and Shen, 2013;Ahmed et al, 2017;Ji et al, 2019a).…”

“…Theoretically, the oil price's relationship to production costs and future cash flow could affect confidence in financial markets (Liu et al, 2019a). As a result, higher oil prices may decrease share prices, dampening profits and changing investment strategies, thus further stabilizing domestic prices (Razmi et al, 2016;Wen et al, 2019b). The second channel concerns the fiscal changes used to model expected consumer and producer prices.…”

Oil Price Shocks, Systematic Monetary Policy and Economic Activity

“…Applying two simulation methods [Sims and Zha (1996); Bernanke, et al (2004); Nusair (2016); Razmi, et al (2016)], we find that a contractionary monetary policy resulting from the oil price shocks contributes to an output loss in Pakistan. Figure 1 elaborates a negative relationship between the oil price shocks and the tight monetary policy response pursued by the central bank of Pakistan.…”