The Curious Case of Petro-Monetary Transmission Mechanism in Oil-Producing Countries: An Analysis of the Effect of Oil Price on Inflation in Nigeria

Document Type : Research Paper

Author

School of Management & Social Sciences, Pan-Atlantic University, Lagos, Nigeria

Abstract

Using Nigeria as a case study, this study shows that changes in oil price is central to the monetary transmission mechanism in oil-producing countries; a phenomenon which can be described as petro-monetary transmission mechanism. Using a Markov state-switching model, this study shows that there are high and low inflation regimes in the Nigerian economy. Oil price has significant impacts on inflation in the two regimes. Among the common coefficients, exchange rate and credit have significant effects. The empirical evidence from the impulse response functions of the VAR model shows that a one standard deviation shock to credit, interest rate, exchange rate, and oil price generates sharp increases in CPI, thus establishing a petro-monetary transmission mechanism in Nigeria. This study therefore establishes the presence of petro-monetary transmission mechanism in oil-producing countries.  The central banks in these countries should therefore consider the oil price channel in the conduct of monetary policy.

Keywords

References

Abdullahi, B. (2016). Time-Varying VAR with Stochastic Volatility and Monetary Policy Dynamics in Nigeria. Economics Bulletin, 36(4), 2237-2249.
Abounoori, A. A., Nazarian, R., & Amiri, A. (2014). Oil Price Pass-through into Domestic Inflation: The Case of Iran. International Journal of Energy Economics and Policy, 4(4), 662-669.
Adeniji, S. O., Obi, B., & Evans, O. (2018). The Impact of Oil Price Shocks on Stock Market Prices Volatility in Nigeria. Journal of Global Economy, 14(3), 173-190.
Adeola, O., & Evans, O. (2017a). Financial Inclusion, Financial Development, and Economic Diversification in Nigeria. The Journal of Developing Areas, 51(3), 1-15.
---------- (2017b). The Impact of Microfinance on Financial Inclusion in Nigeria. The Journal of Developing Areas, 51(4), 193-206.
Adeola, O., & Evans, O., (2019). Digital Tourism: Mobile Phones, Internet and Tourism in Africa. Tourism Recreation Research, Retrieved from 10.1080/02508281.2018.1562662
Adeola, O., Ngoasong, M. Z., & Evans, O. (2017). The Gender Question and Family Entrepreneurship Research(159-176). In Knowledge, Learning and Innovation. Cham: Springer.
Ahmed, F., Kashif, M., & Irfan, M. Z. (2017). Long-Run Relationship between Oil Price and Macroeconomic Indicators using Johansen Co-integration Test: A Case of Pakistan. RADS Journal of Social Sciences & Business Management, 4(1), 79-95.
Barsky, R. B., & Kilian, L. (2001). Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative. NBER Macroeconomics Annual, 16, 137-183.
Basnet, H. C., & Upadhyaya, K. P. (2015). Impact of Oil Price Shocks on Output, Inflation and the Real Exchange Rate: Evidence from Selected ASEAN Countries. Applied Economics, 47(29), 3078-3091.
Bloch, H., Rafiq, S., & Salim, R. (2012). Coal Consumption, CO2 Emission and Economic Growth in China: Empirical Evidence and Policy Responses. Energy Economics, 34(2), 518-528.
Castro, C., & Jiménez-Rodríguez, R. (2017). Oil Price Pass-through along the Price Chain in the Euro Area. Energy Economics, 64, 24-30.
Cecioni, M., & Neri, S. (2011). The Monetary Transmission Mechanism in the Euro Area: Has it Changed and Why? Economic Working Papers, Bank of Italy, Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1849863_code606534.pdf?abstractid=1849863&mirid=1
Cole, D., & Nightingale, S. (2016). Sensitivity of Australian Trade to the Exchange Rate. Reserve Bank of Australia Bulletin, Retrieved from http://www.rba.gov.au/publications/bulletin/2016/sep/pdf/reserve-bank-bulletin-2016-09.pdf
Cunado, J., & De Gracia, F. P. (2005). Oil Prices, Economic Activity and Inflation: Evidence for Some Asian Countries. The Quarterly Review of Economics and Finance, 45(1), 65-83.
Endut, N., Morley, J., & Tien, P. L. (2015). The Changing Transmission Mechanism of US Monetary Policy. Retrieved from http://research.economics.unsw.edu.au/jmorley/emt_forthcoming.pdf
Evans, O., & Saibu, O. (2017) Quantifying the Impact of Monetary and Exchange Rate Policies on Economic Diversification in Nigeria. Nigerian Journal of Economic and Social Studies, 59(1), 131-152.
Evans, O. (2019a). Money, Inflation and Output in Nigeria and South Africa: Could Friedman and Schwartz Be Right. Journal of African Business, Retrieved from https://doi.org/10.1080/15228916.2019.1581012
---------- (2019b). The Effects of US-China Trade Ear and Trumponomics. Forum Scientiae Oeconomia, 7(1), 47-58.
---------- (2019c). Block-chain Technology and the Financial Market: An Empirical Analysis. Actual Problems of Economics.
---------- (2019d). The First-class You. Lagos: Rysearch.
---------- (2018). Connecting the Poor: the Internet, Mobile Phones and Financial Inclusion in Africa. Digital Policy, Regulation and Governance, 20(6), 568-581.
---------- (2017). Threshold Effects in the Relationship between Interest Rate and Financial Inclusion in Nigeria. Journal of Economics and Business Research, 23(1), 7-22.
Filis, G., & Chatziantoniou, I. (2014). Financial and Monetary Policy Responses to Oil Price Shocks: Evidence from Oil-importing and Oil-exporting Countries. Review of Quantitative Finance and Accounting, 42(4), 709-729.
Gagnon, J. E., & Ihrig, J. (2004). Monetary Policy and Exchange Rate Pass‐through. International Journal of Finance & Economics, 9(4), 315-338.
Grigoli, F., Herman, A., & Swiston, A. J. (2017). A Crude Shock; Explaining the Impact of the 2014-2016 Oil Price Decline across Exporters. Retrieved from https://www.researchgate.net
Hamilton, J. D. (1989). A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle. Econometrica, 57, 357-384.
Ibeabuchi, O. (2007). Overview of Monetary Policy in Nigeria. Retrieved from http://library.cbn.gov.ng:8092/jspui/handle/123456789/97
Ifeakachukwu, N. P., & Olufemi, S. M. (2012). The Monetary Transmission Mechanism in Nigeria: A Sectoral Output Analysis. International Journal of Economics and Finance, 4(1), 204-210.
IMF. (2015). Falling Oil Prices Hurt Exporters across Mideast, Central Asia, Regional Economic Outlook. Retrieved from https://www.imf.org/external/pubs/ft/survey/so/2015/CAR012115A.htm
Ireland, P. (2008). The New Palgrave Dictionary of Economics (2nd Ed., Ed. by S. N. Durlauf and L. E. Blume). Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.483.7677&rep=rep1&type=pdf
Lescaroux, F., & Mignon, V. (2008). On the Influence of Oil Prices on Economic Activity and other Macroeconomic and Financial Variables. OPEC Energy Review, 32(4), 343-380.
Mishra, P., & Montiel, P. (2013). How Effective is Monetary Transmission in Low-income Countries? A Survey of the Empirical Evidence. Economic Systems, 37(2), 187-216.
Nwaogwugwu, I., & Evans, O. (2016). A Sectoral Analysis of Fiscal and Monetary Actions in Nigeria. The Journal of Developing Areas, 50(4), 211-230.
Obafemi, F. N., & Ifere, E. O. (2015). Monetary Policy Transmission Mechanism in Nigeria: A FAVAR Approach. International Journal of Economics and Finance, 7(8), 229-239.
Omolade, A., & Ngalawa, H. (2016). Monetary Policy Transmission Mechanism and Growth of the Manufacturing Sectors in Libya and Nigeria. Journal of Entrepreneurship, Business and Economics, 5(1), 67-107.
Salisu, A. A., Isah, K. O., Oyewole, O. J., & Akanni, L. O. (2017). Modelling Oil Price-inflation Nexus: The Role of Asymmetries. Energy, 125, 97-106.
Zhao, L., Zhang, X., Wang, S., & Xu, S. (2016). The Effects of Oil Price Shocks on Output and Inflation in China. Energy Economics, 53, 101-110.
Iranian Economic Review
Volume 25, Issue 1
March 2021
Pages 107-120

Files

Share

How to cite

Statistics