AN EMPIRICAL ANALYSIS OF PASS-THROUGH OF OIL PRICES TO INFLATION: EVIDENCE FROM NIGERIA.* AUWAL, Umar Department of Economics, Ahmadu Bello University, Nigeria – West Africa [email protected], [email protected]+234 803 227 4567 , +234(0)705 727 6029 1
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A N E MPIRICAL A NALYSIS OF P ASS -T HROUGH OF O IL P RICES TO I NFLATION : E VIDENCE FROM N IGERIA. * AUWAL, Umar Department of Economics, Ahmadu Bello.
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AN EMPIRICAL ANALYSIS OF PASS-THROUGH OF OIL PRICES TO INFLATION: EVIDENCE
Introduction. Received Knowledge vs. Objective(s). Data Source and Estimation techniques. Models Specification. Unit Root test. Models Estimation, interpretation and
Analysis. Summary and Conclusions.
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1.0 INTRODUCTION Oil prices have risen sharply over the last year,
leading to concerns that we could see a repeat of the 1970s, when rising oil prices were accompanied by severe recessions and surging inflation.
The oscillation of global oil prices has always been a major concern in market instability. This instability resulted into inflation. Consequently, the price of oil and inflation are often seen as being connected within a cause and effect framework. As oil prices move up or down, inflation follows in the same direction. The reason why this happens may be that oil is a major input in the economy - it is used in critical activities such as fueling transportation or goods made with petroleum products - and if the costs of intermediate input rise, so should the cost of end output (http://www.investopedia.com/ask/answers/06/oilpricesinflation.asp) .
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INTRODUCTION (CONT…) Crude Oil Prices Period of high price strategy in the oil market Period of substantial decrease in crude oil
prices - It reached a peak of $147 in july,2008 and decrease to $38.6 in December, 2008 and now is below $80 (Abosedra, 2009).
Nigeria : (i)a mono-cultural economy
(ii)recognized as one of the most volatile economies in the world
Volatility: a major constraint on development Causes: planning more problematic and
investment more risky (Ukwu et.al, 2003) 4
2.0 OBJECTIVES OF THE STUDY:
There have been many papers that have examined pass-through of oil price fluctuations to exchange rate as well as some that have examined pass-through to domestic inflation.
Many of the recent studies have concentrated on the relationship between an country’s characteristics and the pass-through of oil price fluctuations in that country.
The objective of this paper is to empirically analyze the pass-through of oil price shock to inflation in Nigeria. Specifically – It examines the
historical relationship between oil price shocks and inflation in light of trend analysis and some recent research, and
Estimate and analyzes the impact of oil price and exchange rates on inflation.
it uses monthly data from 2003:01 to 2012:10.
Received Knowledge Objective(s)
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3.0 DATA SOURCE AND METHODOLOGY
Monthly data :2003:01 - 2012:10
Type : Crude Oil Prices, Exchange rates and Inflation
Source: Central Bank of Nigeria’s website – Data and Statistics division
OLS, VAR-VECM and Granger Causality model were employed to analyze the data.
Data Source Models employed
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TREND ANALYSIS
7
8
20
40
60
80
100
120
140
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
OIL_PRICE
9
110
120
130
140
150
160
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
EXCHANGE_RATE
10
0
5
10
15
20
25
30
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
INFLATION
Model Model SpecificationOLS, VAR-VECM This study employs OLS and VAR-VECM for empirical
analysis and only focusses on three chosen variables: Oil Price (Bonny light, $/B), Exchange rates (N/$) and Inflation (All items – year on change).
Where Inft is Inflation rate for period t. OPt is Crude Oil Price for period t, and EXt is exchange rates for period t. To get the best result, the equation must be in log for all variables.
Pre – estimation tests conducted
Lag selection criteria, Johansen test of Co-integration, System equation estimation
4.0 Models Specification
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),( EXOPfInf tttt EXOPInf
210
tttt EXOPInf lnlnln 210
)(OPfInf
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ADF – TEST
Variable Order of Integration Critical ValuesComputed Values