American Journal of Applied Sciences

The Exchange Rate Pass-Through into Inflation with Symmetric Oil Price Shocks: An Empirical Analysis for Saudi Arabia: 1970-2015

Abdulaziz Hamad Algaeed

DOI : 10.3844/ajassp.2018.30.42

American Journal of Applied Sciences

Volume 15, Issue 1

Pages 30-42

Abstract

The purpose of this paper is to analyze theoretically and empirically the relationship between inflation as a dependent variable and bilateral exchange rate, output gap and symmetric oil price shocks. The ARDL methodology is employed considering the period of 1970-2015. The exchange rate pass-through to inflation will be thoroughly investigated. Johansen’s testing procedure confirms the existence of long-run relationships between consumer price inflation, exchange rate, symmetric oil price changes and output gap as a proxy for aggregate demand. The estimation results reveal that depreciation of the exchange rate and the symmetric oil price shocks are main factors responsible for long-run domestic consumer price inflation in Saudi Arabia. Although the output gap as a proxy for aggregate demand had the right sign but its contribution is little in explaining the variations in domestic inflation in the long-run. This could be attributed to the sufficient Saudi economic capacity. In economic literature, the findings here are in line and consistent with other researchers’ estimation results.

Copyright

© 2018 Abdulaziz Hamad Algaeed. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.