Modelling oil price-inflation nexus: the role of asymmetries

In this paper, we examine the role of asymmetries in oil price-inflation nexus for selected net oil exporting and net oil importing countries using quarterly data from 2000 to 2014. We consider a dynamic panel data model that allows for large T panels and employ the Shin et al. [1] approach to decompose oil price into positive and negative shocks. We find a significant long-run positive relationship between oil price and inflation for both categories with mixed evidence in the short run. More importantly, in the long run, oil price exerts a greater impact on inflation of net oil importing countries than their oil exporting counterparts. However, oil price asymmetries seem to matter more when dealing with oil exporting nations while the oil price-inflation relationship tends to be unstable over time regardless of the categories. The result is robust to different oil price proxies and income levels.