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