Households’ Consumption, Oil Price, Exchange Rate and Inflation in Oil Exporting Countries: Evidence from the OPEC

Authors

  • Yunana Ishemu Zumba Department of Economics, University of Jos, Jos, Nigeria
  • Funmilayo Gift Adeshola Department of Economics, University of Jos, Jos, Nigeria
  • Jane Unajin Mankilik Department of Economics, University of Jos, Jos, Nigeria
  • Ezekiel Etu Achema Department of Economics, University of Ibadan, Ibadan, Nigeria

Keywords:

Exchange Rate, Households, Consumption, Inflation, Oil Price, OPEC, Panel ARDL.

Abstract

We use annual data for the period 1995-2017 to examine the impact of consumption of households, exchange rate and oil price on inflation in the Organization of Petroleum Exporting Countries (OPEC). We utilize full sample size – all the OPEC member countries for the study and panel Autoregressive Distributed Lag (ARDL) model. The Mean Group (MG) and the Pooled Mean Group (PMG) were used to estimate the panel ARDL model, after which we choose the efficient estimator. Brent oil price is used for the main estimation, afterwards, we carry out robustness check using WTI oil price. Our evidence establishes that the estimates are not sensitive to the oil price used. Besides, our findings reveal that oil price and exchange rate are not major determinants of inflation in the short run. Also, we find final demand for goods and services (households’ consumption) to be weak in promoting inflation in both the short and long run.  In the long run however, oil price and exchange rate are key factors that cause inflation in the OPEC. We therefore conclude that in the long run, oil price and exchange rate determine inflation in the OPEC while households’ consumption is not a main driver of inflation in these countries. Thus, we recommend that oil proceeds be channeled to the real sectors of the OPEC as well as the formulation and implementation of policies capable of strengthening the value of currencies of the OPEC member countries.

References

A. Lopez-Villavicencio and V. Mignon. “Exchange Rate Pass-Through in Emerging Countries: do the Inflation Environment, Monetary Policy Regime and Central Bank Behaviour Matter?” Journal of International Money and Finance, vol. 79, pp. 20-38, 2017.

N. G. Mankiw. Macroeconomics. 7th ed. New York: Worth Publishers, 2010.

F. S. Mishkin and A. Serletis. The Economics of Money, Banking and Financial Markets, 4th Canadian ed. Spain: Pearson Education Limited, 2013.

P. Sadorsky. “Oil Price Shocks and Stock Market Activity.” Energy Economics, vol. 2, pp. 449-469, 1999.

R. N. R. M. Alsaedi. “The Relationship Between Oil Prices, Inflation, Exchange Rate and Economic Activities: Cases GCC between 2010 to 2014.” International Journal of Sciences: Basic and Applied Research (IJSBAR), vol. 24, no. 1, pp. 117-137, 2015.

L. Zhao, X. Zhang, S. Wang and S. Xu. “The Effects of Oil Price Shocks on Output and Inflation in China.” Energy Economics, vol. 53, pp. 101-110, 2016.

E. P. Z. Lado. “Test of Relationship Between Exchange Rate and Inflation in South Sudan: Granger-Causality Approach.” Science Publishing Group, vol. 4 no. 2, pp. 34-40, 2015.

G. Kaul and C. M. Jones. “Oil and the Stock Markets.” Journal of Finance, vol. 51, pp. 463-491, 1996.

A. Lopez-Villavicencio and M. Pourroy. “Inflation Target and (A)Symmetries in the Oil Price Pass-Through to Inflation.” Energy Economics https://doi.org/10.1016/j.eneco.2019.01.025, 2019.

O. F. Ebiringa, and N. Anyaogu. “Exchange Rate, Inflation and Interest Rates Relationships: An Autoregressive Distributed Lag Analysis.” Journal of Economics and Development Studies, vol. 2 no. 2, pp. 263-279, 2014.

J. Wu and J. Wu. “Does a Flexible Exchange Rate Regime Increase Inflation Persistence?” Journal of International Money and Finance, vol. 86, pp. 244-263, 2018.

A. H. Meltzer. “Origins of the Great Inflation.” Federal Reserve Bank of St. Louis Review 2, pp. 145-175, 2005.

J. Al-Qenaie. Causes of Inflation Across Main Oil Exporting Countries. SciencesPo, Kuwait, 2016.

F. Bashir, S. Nawaz, K. Yasin, U. Khursheed, J. Khan, and M. J. Qureshi. “Determinants of Inflation in Pakistan: An Econometric Analysis Using Johansen Co-Integration Approach.” Australian Journal of Business and Management Research, vol. 1 no. 5, pp 71-82, 2011.

N. Al-Shammari, and M. Al-Sabaey. “Inflation Sources Across Developing and Developed Countries; Panel Approach.” International Business and Economics Research Journal, vol. 11, pp. 185-192, 2012

WDI (2017). World Bank Data Bank.

S. K. Sek, X. Q. Teo and Y. N. Wong. “A Comparative Study on the Effects of Oil Price Changes on Inflation.” Procedia Economics and Finance, vol. 26, pp. 630-636, 2015.

M. Lacheheb and A. Sirag. “Oil Price and Inflation in Algeria: A Nonlinear ARDL Approach.” The Quarterly Review of Economics and Finance, https://doi.org/10.1016/j.qref.2018.12.003, 2019.

M. S. Shaari, N. E. Hussain and H. Abdullah. “The Effects of Oil Price Shocks and Exchange Rate Volatility on Inflation: Evidence from Malaysia.” International Business Research, vol. 5 no. 9, pp. 106-112, 2012.

A. A. Salisu, K. O. Isah, O. J. Oyewole and L. O. Akanni. “Modelling Oil Price-Inflation Nexus: The Role of Asymmetries.” Energy, doi: 10.1016/j.energy.2017.02.128, 2017.

M. G. Finn. “Perfect Competition and the Effects of Energy Price Increases on Economic Activity.” Journal of Money Credit and Banking, vol. 32, pp. 400-416, 2000.

P. R. Krugman, M. Obstfeld and M. J. Melitz. “International Economics: Theory and Policy” 9th ed. United States: Pearson, 2012.

F. Akçelik, and F. Ogunç. “Pass-Through of Crude Oil Prices at Different Stages in Turkey.” Central Bank Review, vol. 16, pp. 41-51, 2016.

S. K. Sek. “Impact of Oil Price Changes on Domestic Price Inflation at Disaggregated Levels: Evidence from Linear and Nonlinear ARDL Modelling. Energy doi: 10.1016/j.energy.2017.03.152, 2017.

S. Hammoudeh and J. C. Reboredo. “Oil Price Dynamics and Market-Based Inflation Expectations.” Energy Economics, vol. 75, pp. 484-491, 2018.

I. A. Moosa. “Can OPEC cause Inflation and Recession?” Energy Policy, vol. 1, pp. 1145-1154, 1993.

R. T. Mpofu.” Money Supply, Interest Rate, Exchange Rate and Oil Price Influence on Inflation in South Africa.” Corporate Ownership and Control, vol. 8 no. 3, pp.594-605, 2011.

Y. Shin, B. Yu and M. Greenwood-Nimmo. Modelling Symmetric Cointegration and Dynamic Multipliers in an ARDL Framework. In: Horace, W. C, 2014.

M. H. Peseran and Y. Shin. “An Autoregressive Distributed Lag Modelling Approach to Cointegration and Economic Theory in the 20th Century.” In the Ranger Frisch Centennial Symposium. The Cambridge University Press, pp. 371-413, 1995.

M. H. Pesaran, Y. Shin and R. P. Smith. “Pooled Mean Group Estimation of Dynamic Heterogeneous Panels.” Journal of the American Statistical Association, vol. 94, pp. 621-634, 1999.

H. Pesaran and R. Smith. “Estimating Long Run Relationships from Dynamic Heterogenous Panels. Journal of Econometrics, vol. 68, pp. 79-113, 1995.

A. Levin, C. F. Lin and C. S. J. Chu. “Unit root Test in Panel Data: Asymptotic and Finite-Sample Properties.” Journal of Econometrics, vol. 1, pp. 1-24, 2002.

J. Breitung. “The Local Power of Some Unit Root Tests for Panel Data.” Advances in Econometrics, vol. 15, pp. 161-177, 2000.

K. Hadri. “Testing for Stationarity in Heterogeneous Panel Data.” Economics, vol. 2, pp. 148-161, 2000.

Y. I. Zumba, F. G. Adeshola, O. S. Chiagoziem and M. Abe. “Modelling Tourism and Economic Growth Nexus in Africa: A Symmetric ARDL Approach.” Scientific Research Journal, vol. 7 no. 4, pp. 139-153, 2019.

Downloads

Published

2019-07-26

How to Cite

Ishemu Zumba, Y., Gift Adeshola, F., Unajin Mankilik, J., & Etu Achema, E. (2019). Households’ Consumption, Oil Price, Exchange Rate and Inflation in Oil Exporting Countries: Evidence from the OPEC. American Scientific Research Journal for Engineering, Technology, and Sciences, 58(1), 61–72. Retrieved from https://www.asrjetsjournal.org/index.php/American_Scientific_Journal/article/view/4965

Issue

Section

Articles