The impact of oil prices on inflation: The case of Azerbaija

Abstract

This paper investigates the relationship between inflation, oil prices and exchange rate in Azerbaijan using the vector error correction model (VECM) to the data ranging from 1995 to 2017. The results from cointegration method confirm the existence of a long-run relationship among the variables. Moreoverestimation results of VECM show that the oil prices and exchange rate have positive and statistically significant impact on inflation in the long-run. Thiimplies that 1% increase in oil prices and exchange rate increases inflation by 0.58% and 1.81%, respectively. The results of the study also reveal thainflation is observed during the periods of both high and low oil prices, and the exchange rate acts as the transmission channel from oil prices to inflation.