Research Article Open Access

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

Abdulaziz Hamad Algaeed1
  • 1 Department of Finance and Banking, College of Business Administration, Dar Al Uloom University. Riyadh, Saudi Arabia. P. O. Box 87757, Riyadh 11652, Saudi Arabia

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.

American Journal of Applied Sciences
Volume 15 No. 1, 2018, 30-42

DOI: https://doi.org/10.3844/ajassp.2018.30.42

Submitted On: 17 November 2017 Published On: 26 January 2018

How to Cite: Algaeed, A. H. (2018). The Exchange Rate Pass-Through into Inflation with Symmetric Oil Price Shocks: An Empirical Analysis for Saudi Arabia: 1970-2015. American Journal of Applied Sciences, 15(1), 30-42. https://doi.org/10.3844/ajassp.2018.30.42

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Keywords

  • Saudi Arabia
  • Exchange Rate
  • Inflation
  • ARDL
  • Pass-through