Investigating Causal Relations between Oil Prices and Key Macroeconomic Variables : The Case of India

This paper examines the effect of oil price volatility on inflation, economic growth and the stock market in India using a vector error correction model (VECM) in India. Estimated results suggest that the overall price level, the real effective exchange rate, and oil prices are negatively related to aggregate output in the long run. Granger causality test results derived from the VECM support bidirectional causality between oil prices and aggregate output, indicating that a change in oil price also affects aggregate output in the short run. Variance decomposition and the impulse response functions also validate the findings