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Oil price shocks and domestic inflation in Thailand

Jiranyakul, Komain (2016): Oil price shocks and domestic inflation in Thailand.

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Abstract

This paper employs monthly data to examine the empirical relationship between oil price shocks and domestic inflation rate during 1993 and 2015. Three cointegration tests and the two-step approach are used. In addition, the asymmetry of oil price shocks on inflation is also investigated. The results show that real oil price measured in domestic currency is not cointegrated with consumer price index and industrial production index. Therefore, the relationship is confined to the short-run phenomenon. The results from the two-step approach estimation show that an oil price shock causes inflation to increase while oil price uncertainty does not cause an increase in inflation. Furthermore, the short-run relationship between inflation and oil price shocks is not asymmetric. There is also bidirectional causality between inflation and inflation uncertainty, which might stem from monetary policy exercised by the central bank. The findings of this study encourage the monetary authorities to formulate a more accommodative policy to respond to oil price shocks, which positively affect inflation rate. In addition, oil subsidization by the government should not be abandoned.

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