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Dynamic Relationship between Oil Price and Inflation in Oil Exporting Economy: Empirical Evidence from Wavelet Coherence Technique

Author

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  • Tomiwa Sunday Adebayo

    (Cyprus International University, Northern Cyprus Mersin, Turkey Faculty of Economics and Administrative Science, Department of Business Administration, Turkey.)

Abstract

This paper examined the co-movement and causality between oil price and inflation using monthly data spanning between January 2007 and March 2020. The study employed the wavelet coherence techniques which are a new technique in economics and finance to verify the co-movement and causality simultaneously. Additionally, Granger and Toda Yamamoto?s causality tests were deployed as a robustness check for the wavelet coherence techniques. Findings from the wavelet coherence technique reveal; (a) positive co-movement between the inflation and oil price between 2014M2 and 2017M1 at scale 4-8; (b) there is evidence of causality from oil price to inflation. Wavelet coherence technique revealed unidirectional causality running from oil price to inflation which is also confirmed by the Granger and Toda Yamamoto causality tests. To the author?s understanding, no studies concerning oil price and inflation nexus in the case of Nigeria have deployed this technique. Based on these findings, recommendations were put forward.

Suggested Citation

  • Tomiwa Sunday Adebayo, 2020. "Dynamic Relationship between Oil Price and Inflation in Oil Exporting Economy: Empirical Evidence from Wavelet Coherence Technique," Energy Economics Letters, Asian Economic and Social Society, vol. 7(1), pages 12-22, June.
  • Handle: RePEc:asi:eneclt:2020:p:12-22
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    More about this item

    Keywords

    Oil price; Inflation; Wavelet coherence technique; Granger causality; Toda yamamoto causality.;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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