Transactions on Data Analysis in Social Science

Transactions on Data Analysis in Social Science

Investigating the Nonlinear Effects of Oil Shocks on Inflation: New Empirical Evidence from Iran

Document Type : Original Article

Authors
A. M. Tehranchian 1
S. M. Khabaz 2
S. Hosseinnia Chafjiri 2
1 Professor, Department of Economics, Faculty of Economic and Administrative Sciences, University of Mazandaran, Babolsar, Iran
2 M.A. Student in Economics, Faculty of Economic and Administrative Sciences, University of Mazandaran, Babolsar, Iran
10.47176/TDASS.2024.68
Abstract
This study investigates the nonlinear relationship between oil price shocks and inflation in Iran over the period 1978–2022. Utilizing the Hodrick–Prescott filter, the research first decomposes oil price movements into positive and negative shocks. These shocks, alongside key macroeconomic variables such as liquidity and the exchange rate, are then incorporated into a nonlinear Markov-switching model to examine their respective effects on inflation dynamics. The empirical results reveal a significant nonlinear and asymmetric impact: negative oil price shocks exert a more pronounced influence on inflation compared to positive shocks. This asymmetry is largely attributed to the contractionary consequences of falling oil revenues, which reduce money supply and contribute to economic slowdown. In contrast, positive shocks although expansionary have a relatively weaker transmission effect. The study highlights the importance of accounting for this asymmetry in macroeconomic planning. Accordingly, it recommends that policymakers integrate the direction and magnitude of oil price fluctuations when formulating stabilization and inflation control strategies. These findings underscore the necessity of adopting a nuanced approach in energy-exporting economies like Iran, where external oil market volatility can have substantial domestic inflationary implications.
Keywords
Oil Shocks
Inflation
Markov-Switching Model
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Transactions on Data Analysis in Social Science
Volume 6, Issue 2
Spring 2024
Pages 68-81

  • Receive Date 02 January 2024
  • Revise Date 24 March 2024
  • Accept Date 07 May 2024