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Oil price shocks, inflation and policy response: the emerging market experience

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  • T.G. Saji

Abstract

This research empirically examines the monetary policy responses towards the oil price pass-through to inflation dynamics in an emerging market like India during the period 2006-2017. Our results, based on vector auto-regressive (VAR) estimation, find low and insignificant crude price transmission to domestic fuel prices due to weighted tax content in the retail prices. The propagation effect of the fuel price hike to headline inflation is dismal or at minimum. The study observes weak causality from monitory policy to headline inflation, while the reverse relationship is found substantial and significant. The findings ultimately suggest the continued adherence to the present rule-based monetary policy framework of pegging policy rates to inflationary expectations in India enables the Monetary Policy Committee (MPC) to recognise the short-term trade-off between inflation and growth, while allows it to stabilise prices in the long-run and across different economic cycles.

Suggested Citation

  • T.G. Saji, 2024. "Oil price shocks, inflation and policy response: the emerging market experience," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 20(2), pages 161-177.
    • Handle: RePEc:ids:ijepee:v:20:y:2024:i:2:p:161-177
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