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

Author

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  • Sam Olofin

    () (Centre for Econometric and Allied Research, University of Ibadan)

  • Afees A. Salisu

    () (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.

Suggested Citation

  • Sam Olofin & Afees A. Salisu, 2017. "Modelling oil price-inflation nexus: The role of asymmetries and structural breaks," Working Papers 020, Centre for Econometric and Allied Research, University of Ibadan.
  • Handle: RePEc:cui:wpaper:0020
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    References listed on IDEAS

    as
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    Cited by:

    1. repec:eee:eneeco:v:68:y:2017:i:c:p:1-18 is not listed on IDEAS
    2. Afees A. Salisu & Ahamuefula Ephraim Ogbonna, 2017. "Improving the Predictive ability of oil for inflation: An ADL-MIDAS Approach," Working Papers 025, Centre for Econometric and Allied Research, University of Ibadan.
    3. repec:eee:ecmode:v:71:y:2018:i:c:p:134-158 is not listed on IDEAS
    4. repec:eee:eneeco:v:70:y:2018:i:c:p:334-356 is not listed on IDEAS
    5. Afees A. Salisu & Ahamuefula Ephraim Ogbonna, 2017. "Forecasting GDP with energy series: ADL-MIDAS vs. Linear Time Series Models," Working Papers 035, Centre for Econometric and Allied Research, University of Ibadan.
    6. repec:blg:reveco:v:69:y:2017:i:5:p:55-72 is not listed on IDEAS
    7. Salisu, Afees A. & Isah, Kazeem O., 2018. "Predicting US inflation: Evidence from a new approach," Economic Modelling, Elsevier, vol. 71(C), pages 134-158.
    8. Salisu, Afees A. & Isah, Kazeem O., 2018. "Predicting US inflation: Evidence from a new approach," Economic Modelling, Elsevier, vol. 71(C), pages 134-158.
    9. repec:eee:ecmode:v:66:y:2017:i:c:p:258-271 is not listed on IDEAS
    10. Salisu, Afees A. & Ademuyiwa, Idris & Isah, Kazeem O., 2018. "Revisiting the forecasting accuracy of Phillips curve: The role of oil price," Energy Economics, Elsevier, vol. 70(C), pages 334-356.
    11. repec:eee:ecmode:v:64:y:2017:i:c:p:443-448 is not listed on IDEAS

    More about this item

    Keywords

    Oil price; Inflation; Asymmetry; Structural breaks; Linear ARDL; Non-linear ARDL;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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