Oil Price Shocks and Domestic Inflation in Thailand

This paper employs monthly data to examine the impact of oil price shocks on the domestic inflation rate in Thailand from 1993 to 2017. Both linear and nonlinear cointegration tests are used to examine the long-run relationship between price level, industrial production and the real price of oil. Furthermore, the two-step approach is used to examine how an oil price shock and oil price volatility affect the inflation rate. In addition, the asymmetry of oil price shocks on inflation is also investigated. The results show that price level is positively affected by the real oil price and industrial production index in the long run. The short-run analysis reveals that there is a positive relationship between oil price shock and domestic inflation. The estimated results from the two-step approach show that an oil price shock causes inflation to increase while oil price uncertainty does not cause inflation. Furthermore, the short-run relationship between inflation and oil price shocks is statistically significant. However, the response of inflation to oil price shocks does not seem to be asymmetric. The findings from this study will 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