Abstract
This paper investigates the effects of global oil and food price shocks to consumer prices in Middle East-North African (MENA) countries using threshold cointegration methods. Oil and food price shocks increase domestic prices in the long run, whereby the impact of food prices dominates. While global prices are weakly exogenous, consumer prices respond to deviations from the equilibrium relationship. The short run adjustment pattern exhibits asymmetries and is particularly strong after positive shocks. Downward rigidities on wages may play a crucial role in this regard, as the relatively weak reactions of consumer prices after negative shocks are related to labour market institutions and public subsidies. The more rigid the regulations the more pronounced are the asymmetries. Robustness checks show that international price shocks do not affect GDP growth.
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Notes
We finally decided to set the threshold equal to zero in order to be able to differentiate between positive and negative shocks. A value of zero would approximately also result from the application of the Hansen-Seo testing procedure for two-regime threshold cointegration in vector error-correction models (Hansen and Seo 2002). The results are available on request from the authors.
We also experimented with the real exchange rate instead of the nominal rate and gained overall similar results.
In principle, we could have substituted the relevant entries by an NA (not available).
This table is available on request.
It may be argued that real prices might be a better choice. The results are available on request, but with an eye on the lack of a long-run relation, we feel legitimized to concentrate on the inflation reaction.
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Belke, A., Dreger, C. The transmission of oil and food prices to consumer prices. Int Econ Econ Policy 12, 143–161 (2015). https://doi.org/10.1007/s10368-014-0283-x
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DOI: https://doi.org/10.1007/s10368-014-0283-x