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Oil Prices and Inflation: Identifying Channels for Oil Exporters

Author

Listed:
  • Vugar Ahmadov

    () (Central Bank of Azerbaijan Republic)

  • Salman Huseynov

    () (Central Bank of Azerbaijan Republic)

  • Peter Pedroni

    () (Williams College)

Abstract

In this paper, we study oil price pass through into domestic inflation in a panel of oil exporting countries and propose a methodology to disentangle potential effects of different transmission channels. In particular, we investigate effects of three transmission channels, namely, import (cost) channel, exchange rate channel, and fiscal (demand) channel and quantify the relative importance of them. We find that the most important channel is the import channel and the least important one is the fiscal channel in contrast to wildly held belief. This finding, though surprising, can be explained by vast heterogeneity and rising integration among countries. We also find that institutional arrangements such as exchange regime, existence of fiscal rules and sovereign wealth funds are important pillars of a lower inflation environment in oil exporting countries.

Suggested Citation

  • Vugar Ahmadov & Salman Huseynov & Peter Pedroni, 2018. "Oil Prices and Inflation: Identifying Channels for Oil Exporters," Working Papers 1801, Central Bank of Azerbaijan Republic.
  • Handle: RePEc:aze:wpaper:1801
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    More about this item

    Keywords

    Panel VAR; Oil Exporting Countries;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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