Oil price shocks and inflation rate persistence: A Fractional Cointegration VAR approach

This study investigates the effect of oil price shocks on the inflation persistence of the top ten (10) oil-exporting and oil-importing countries. The study employs the recently developed fractional cointegration vector autoregressive (FCVAR) approach. It accounts for the role of monetary policy framework and exchange rate regime. It also tests and accounts for oil price asymmetry. The results show that inflation rate persistence of oil-exporting and oil-importing countries does not increase due to oil price shocks suggesting that the monetary policy of these countries accommodates oil price shocks, and may not necessarily be changed due to oil price shocks. This holds for countries operating floating regimes and inflation targeting, and those operating pegged regimes and non-inflation targeting monetary policy framework. The monetary policy of oilimporting countries appears to accommodate oil price shocks. As failure to account for oil price asymmetry tends to exaggerate inflation persistence for both oil-exporting and oil-importing countries, the conclusions do not change markedly. This result is consistent after accounting for oil price asymmetry, under positive and negative oil price shocks. (C) 2021 Economic Society of Australia, Queensland. Published by Elsevier B.V. All rights reserved.

Automated summary

The study finds that the inflation rate persistence of oil-exporting and oil-importing countries does not increase due to oil price shocks, suggesting that their monetary policies can accommodate oil price fluctuations. Failure to account for oil price asymmetry tends to exaggerate inflation persistence. This conclusion holds for different monetary policy frameworks and exchange rate regimes.