The nonlinear and asymetric pass‐through effect of crude oil prices on inflation

• Published date: 01 March 2022
• Author: Utku Altunöz
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/opec.12221

The nonlinear and asymetric pass-through

effect of crude oil prices on inflation

Utku Altun ¨

oz

Department of Economics, Faculty of Economics and Administrative Sciences, Sinop University, Sinop,

Turkey. Email: utkual@hotmail.com

Abstract

This paper examines pass-through of crude oil prices on consumer prices index (CPI) and producer

prices index (PPI) in Turkey in the augmented Phillips curve context by applying ARDL

(autoregressive distributed lag) and NARDL (non-linear ARDL) models. The results show that the

effects of volatility in crude oil prices to Turkey’s consumer price index and producer prices index

are not symmetrical in the long run. The long-term effects of the increase in international oil prices

consumer price index and producer prices index are higher than the case where international oil

prices show reduction. When compared to ARDL model, NARDL model reveals more significant

results that are required to consider the asymmetry effect of international oil prices to consumer

price index. Moreover, if crude oil prices rise, both indices are affected differently. Therefore,

economic authorities in Turkey should adopt different density monetary policy efforts to respond

the rise and fall of global oil prices. Focusing on further loosening the control of oil prices and

reducing the cartel valuing power of oil enterprises are among the options together with

implementing long-term policies that encourage renewable energy sources.

1. Motivation

Crude oil, which has a strategic position among primary energy sources, meets 33.6 per

cent of world energy demand as of 2018. With her geopolitical position, Turkey is a

neighbour with the countries being known with the world’s proven oil and natural gas

resources. In addition, Turkey is involved in many important projects, including a

natural energy centre between Middle Eastern states, Central Asian, the energy-rich

Caspian and European consumer markets; and supports these projects. However, Turkey

has not material oil stocks; thus, it depends on oil imports in its economy.

Main factors make the oil market different from other commodity markets and

because of this, oil is a non-renewable resource. Known oil reserves indicate that oil may

end at the end of the 21st century. In this case, every barrel removed from the ground

means that the oil reserves are reduced slightly. The fact that the reserves are limited in

this way and the serious consumption of oil is one of the most crucial motivations for the

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31

increase in oil price. This also makes oil consumption variable on economic growth. Its

price volatility also inherits a high level of political risk. Graph 1 shows the events that

have a serious impact on oil prices in chronological order.

The increase in oil prices, which is one of the main inputs of economies, leads to an

increase in input costs and a deterioration of the balance of payments in oil importing

countries. With increasing costs, inflation rates increase, and national income growth

slows down. Otherwise, since oil producer and exporter states increase their income,

they can be positively affected by the increase in oil prices and increase in their growth

rates. Despite the current global economic conjuncture, ongoing population growth,

decrease in energy intensity and high energy consumption levels of developed and

developing countries create uncertainties regarding the world economy and energy

supply. In this context, how oil prices affect macroeconomics is an important research

question. Most of the studies on this issue have found that oil shocks have significant

effects on the economy. Some examples in the relevant context of this research are

Darby, 1982; Hamilton, 1983, 1996, 2011; Chou and Lin, 2013;

¨

Ozt¨

urkler et al., 2015;

Kpodar and Abdallah, 2017; Long and Liang, 2018; and Sek, 2019.

This research aims to examine pass-through of crude oil price on consumer prices

index and producer prices index in Turkey by using ARDL and NARDL models. It aims

to close a gap in the literature where long-term asymmetric pass-through effect of crude

oil prices on inflation is empirically examined in an economy, namely Turkey, which

heavily depends on oil import for its economic activities. In this context, it has three

main contributions to the recent literature. Firstly, it provides a recent empirical evidence

on price volatility of crude oil on both customer price and producer price indices of an

Graph 1 Events that have a serious impact on oil prices.

Source: Bloomberg. [Colour figure can be viewed at wileyonlinelibrary.com]

OPEC Energy Review March 2022 ©2022 Organization of the Petroleum Exporting Countries.

32 Utku Altun¨

oz