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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 aumar@abu.edu.ng , aumar27@yahoo.co.uk +234 803 227 4567 , +234(0)705 727 6029. Organization of the work.
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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 aumar@abu.edu.ng , aumar27@yahoo.co.uk +234 803 227 4567 , +234(0)705 727 6029
Organization of the work • Introduction. • Received Knowledge vs. Objective(s). • Data Source and Estimation techniques. • Models Specification. • Unit Root test. • Models Estimation, interpretation and Analysis. • Summary and Conclusions.
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) .
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)
2.0 Objectives of the study: Received Knowledge Objective(s) • 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.
3.0 Data source and Methodology Data Source Models employed • 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.
6.0 model presentation, estimation& analysis of the results:
7.0 Summary and conclusion • The co-integration between oil price and inflation variable exist at 5% significant level in the long run. • For granger causality test, we found that the inflation does not granger cause to the exchange rate but it does granger cause to the oil price. • The oil price does granger cause to the inflation but it does not granger cause to the exchange rate. • The exchange rate does not granger cause to both of the variables (Inflation and Oil Price). • So, the oil crude price can give an effect on inflation. If the rate of crude oil price changes, the inflation also changes. • The finding will contribute to Nigerian government in making policy towards crude oil price to avoid from the inflation.
