How Oil Price Drops are Reflected by Imported Inflation in Azerbaijan?

Abstract

Oil price shocks are generally seen as a major factor affecting the macroeconomic situation of the country, especially oil exporting countries such as Azerbaijan. While some authors have stated the direct channels of transmission of energy price shocks, other authors have considered the more of an indirect transmission of oil prices effects to the major macroeconomic variables. In this paper a cointegrated vector autoregressive model, vector error correction model model has been considered for Azerbaijan in order to study the response of inflation to oil price shocks. Empirical analysis shows that, for Azerbaijan there seems to be a statistical significant short-run relationship of unexpected oil price shocks on inflation rate that supported to reveal the imported inflation in Azerbaijan. Besides, there have been found a long run relationship running from exports, exchange rate, money supply, imports to the inflation in Azerbaijan as well. In conclusion, decreases in oil prices are transmitted to high imported inflation by lowering the value of domestic exchange rate and increasing the value of imports.Keywords: Imported Inflation, Oil Price Shocks, Exchange Rate, Vector Error Correction Model, Money Supply, ExportsJEL Classifications: C58, E31, E43, E51, F31, O24DOI: https://doi.org/10.32479/ijeep.7462