Asymmetric and Nonlinear Pass-Through of Global Crude Oil Price to Inflation in Turkey

Erkan ÖZATA

Abstract:

Since the fluctuations in oil prices have important economic consequences, it is one of the most frequently investigated topics by scholars and policymakers. Although increase in oil prices is good news for oil exporting countries, it is bad news for countries like Turkey who lack oil reserves and meet energy needs by importing crude oil. Similarly, decreases in global oil prices are expected to reduce the costs and affect oil importing countries positively.  However, these effects do not always happen as expected and the effects of the increase and decrease in oil prices on the economy are realized in different ways. Extensive research in this area shows that the effect of global crude oil prices on domestic inflation is not very clear. Oil price pass-through effect refers to the influence of oil price fluctuations on domestic price indexes like CPI and PPI. In this study, based on the augmented Phillips curve framework, linear and nonlinear ARDL methods are used to examine the asymmetric effects of oil price fluctuations on consumer and producer prices in Turkey. According to the empirical results, the effects of fluctuations in oil prices on consumer and producer prices are asymmetrical in the long run and symmetrical in the short run. The domestic consumer price index (CPI) increased by 13.05% while the producer price index (PPI) increased by 14.7% as a result of a 100% increase in world oil prices. On the other hand a 100% decrease in oil prices reduces the consumer price index by 11.27% and the producer price index by 7.24%. It is observed that the increase in oil prices have a greater impact on producer and consumer prices in the long run. The most rapid impact of the changes in oil prices is seen in the changes in the consumer energy prices. As an oil importing country, Turkey do not have much things to eliminate these first round effects. However, with a convincing monetary policy, it can manage inflation expectations well and reduce the pass through of oil price increases to inflation in the medium and long term.