Oil Price Shocks and Domestic Inflation in Thailand

Abstract

Using monthly data during 1993 and 2017, this paper examines the impact of oil price shocks on the domestic inflation rate in Thailand. Both linear and nonlinear cointegration tests are used to examine the long-run relationship between price level, industrial production, and the real price of oil. Furthermore, the two-step approach is used to examine how an oil price shock and oil price volatility affect the inflation rate. In addition, the asymmetry of oil price shocks on inflation is also investigated. The results show that price level is positively affected by the real oil price and industrial production index in the long run. The short-run analysis reveals that there is a positive relationship between oil price shock and domestic inflation. The estimated results from the two-step approach show that an oil price shock causes inflation to increase while oil price uncertainty does not cause inflation. Furthermore, the short-run relationship between inflation and oil price shocks is statistically significant. However, the asymmetric impacts of oil price shocks on inflation are not apparent. The findings from this study will encourage the monetary authorities to formulate a more accommodative policy to respond to oil price shocks, which positively affect the inflation rate. In addition, oil subsidization by the government should not be abandoned.

Keywords: Oil shocks, inflation, bivariate GARCH, causality

JEL Classification: E31, Q43