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Modelling oil price-inflation nexus: The role of asymmetries and structural breaks

Samuel Olofin () and Afees Salisu ()
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Samuel Olofin: Centre for Econometric and Allied Research, University of Ibadan

No 20, Working Papers from Centre for Econometric and Allied Research, University of Ibadan

Abstract: In this paper, we model the relationship between oil price and inflation for selected OPEC and EU countries using monthly data from 2000 to 2014. We employ both the Linear (Symmetric) ARDL by Pesaran et al. (2001) and Nonlinear (Asymmetric) ARDL by Shin et al. (2014) and we also account for structural breaks using the Bai and Perron (2003) test that allows for multiple structural changes in regression models. Six findings are discernible from our analyses. First, the relationship between oil price and inflation tends to change over short periods. Secondly, the oil price-inflation nexus is stronger in oil exporting countries than oil importing countries. Thirdly, oil price asymmetries seem to matter more when dealing with oil exporting nations. Fourthly, it may be necessary to pre-test for structural breaks when modelling the relationship between oil price and inflation regardless of the category being analyzed. Fifth, while asymmetric effect for the oil exporting (OPEC) is not sensitive to structural breaks, the effect seems to diminish for oil-importing (EU) countries in the presence of breaks. Sixth, while the results are largely insensitive to the nature of data frequency, the behaviour of asymmetry suggests otherwise.

Keywords: Oil price; Inflation; Asymmetry; Structural breaks; Linear ARDL; Non-linear ARDL (search for similar items in EconPapers)
JEL-codes: C12 C22 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-mac
Date: 2017-08
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