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Ratchet Effect in Import Prices – Inflation Rate Nexus

Mutiu A. Oyinlola, Tirimisiyu Oloko and Samuel Orekoya

Economic Alternatives, 2021, issue 3, 335-354

Abstract: This study examined the existence of the ratchet effect in the import price-inflation rate nexus for advanced (high-income) and emerging (middle-income) countries. The study used monthly data from 1980M01 to 2019M07 and compared the potential of the dummy variable-based asymmetric model with that of the Nonlinear Autoregressive Distributed Lag (NARDL) model in modelling the ratchet effect. The result showed that the ratchet effect exists in the import price-inflation rate nexus for high-income and middle-income countries. This suggests that the issue of imported inflation and ratchet effect is country-specific. The significance of the ratchet effect in these countries implies that maintaining a (symmetric) rule-based counter-cyclical monetary policy when dealing with import price shocks would be inefficient, and can make monetary policy harm the economy in the medium to the long term. It is, therefore, recommended that each country should examine the existence or otherwise of ratchet in her import price - inflation rate nexus to determine whether it should adopt a symmetric or an asymmetric rule-based counter-cyclical monetary policy against import price shocks to avoid harming the economy through the implementation of an inefficient monetary policy.

Keywords: Imported inflation; Ratchet effect; Middle income countries; Asymmetric Modelling (search for similar items in EconPapers)
JEL-codes: C22 E31 F41 (search for similar items in EconPapers)
Date: 2021
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Handle: RePEc:nwe:eajour:y:2021:i:3:p:335-354