Is the oil price pass-through to domestic inflation symmetric or asymmetric? new evidence from India based on NARDL

Muhammad Abu-Bakar and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: With 80% oil dependence, which is expected to further increase in coming years due to rapid expansion, and the reforms initiated to deregulate domestic oil market, the association between global oil prices and inflation in India has increased. Using the autoregressive distribution lag (ARDL) and the nonlinear and asymmetric autoregressive distribution lag (NARDL) framework, we investigate the association between global oil prices and inflation. The ARDL results indicate no association between the two, whereas NARDL findings not only point to long term association but also indicates asymmetric pass-through. Precisely, domestic prices increase with the increase in global oil prices but the decrease in global oil prices has no significant association with the domestic prices. These results are robust to the inclusion of additional variables, different proxy of oil prices (WTI crude) and different time period (January 2003 to January 2018). The contrasting results obtained from the ARDL and the NARDL modelling highlight the importance of using non-linear framework, especially in high oil dependence country with non-competitive market structure. The results have implications for welfare assessment and the effectiveness of monetary policy.

Keywords: Oil Price; Inflation; asymmetry; India; non-linear ARDL (search for similar items in EconPapers)
JEL-codes: C22 C58 Q43 (search for similar items in EconPapers)
Date: 2018-06-12
New Economics Papers: this item is included in nep-ene and nep-ets
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