Distributional changes in oil price and inflation in the net oil exporting countries in Africa

Abstract

The debate on oil price changes and inflation has attracted considerable empirical investigations among policy makers over the years. Most of the empirical literature so far studies disregard the likelihood that oil price changes may influence inflation along various consumer price index distribution. The paper employs a quantile regression model piloted by Koenker and Xiao (2004) to examine the distributional changes in oil price and their impact on inflation of the net oil exporting countries in Africa. By analyzing the behaviour of inflation in a wide range of quantiles, the technique allows us to capture possible variation and inflation distribution towards to its long-run equilibrium. Our results reveal that negative and positive changes in oil price impacts inflation negatively for majority of the quantiles. The paper also reveals significant disparity in magnitude and sign of the parameters. The result of the quantile regression shows an insignificant negative relationship between positive oil price and inflation across the quantiles at 5% level of significance. However, the opposite is the case when we modeled the negative oil price. It turns out to be a significantly negative coefficient at the lower quantile of 0.50 to higher levels of 0.90. The paper suggests that in order to stabilize the price, stakeholders must continue to monitor impending inflation volatility and take counteractive actions to sustain inflation potentials. The finding also implies that monetary policy makers have the ability to suppress the effects of hostile oil price changes on inflation