Time-Frequency Analysis of Oil price and its Volatility Pass-Through into Inflation in Iran

Document Type : Original Article

Authors

1 MA in Economics, Faculty of Social Sciences, Economics and Accounting, Razi University, Kermanshah, Iran

2 Associate Professor of Economics, Faculty of Social Sciences, Economics and Accounting, Razi University, Kermanshah, Iran

10.48308/jem.2025.236195.1929

Abstract

One of the characteristics of oil-exporting countries like Iran is the dependence of the economic structure on the income from oil exports, which causes the Iranian economy to be affected by the conditions of recession or boom prevailing on the world economy. In this case, extreme oil price fluctuations can affect inflation. In this research, the time-frequency characteristics of the oil price-inflation relationship and oil price-inflation volatility with wavelet analysis approach and monthly data are investigated for the period 1980-2020. The results show that there is a positive, in-phase and significant coherence between inflation and oil prices in the short term. However, in some years, a negative and out-of-phase correlation has been established, so that with the passage of time and in the medium and long term, the coherence between the two series has disappeared. Also, there is a positive and significant correlation between inflation and oil price volatility and by controlling the effect of liquidity growth, the correlation of oil price and oil price volatility with inflation has intensified. Therefore, it is suggested to reduce the country's dependence on oil revenues to the minimum possible amount.

Keywords

Main Subjects


  • Aguiar-Conraria, L., & Soares, M.J., 2011. Oil and the macroeconomy: using wavelets to analyze old issues. Empirical Economics, 40 (3), 645–655.
  • Arman S.A., Ahangari A., Zarra-Nezhad, M. & Zeinvand, A. (2012). Evaluating the Effects of Oil Revenues Fluctuations on Core Inflation in Iran (1338-1388). Journal of Economic Policies, 8(93), 13-130 (In Persian).
  • Bahmani-Oskooee, M., Chang, T., & Ranjbar, O. (2016). Asymmetric causality using frequency domain and time-frequency domain (wavelet) approaches. Economic Modelling. 56, 66–78.
  • Baumeister, C., & Kilian, L. (2015). Forty years of oil price fluctuations: why the price of oil may still surprise us. CFS Working Paper, 30 (1), 139-160.
  • Beechey, M. & Osterholm, P. (2013), The Rise and Fall of U.S. Inflation Persistence. International Journal of Central Banking, 8(3), 55-86.
  • Blanchard, O.J., Gali, J. (2010). The macroeconomic effects of oil price shocks: why are the 2000s so different from 1970s? In: Gali, J., & Gertler, M. (Eds.), International Dimensions of Monetary Policy. University of Chicago Press, Chicago, IL, 373–420.
  • Bodenstein, M., Erceg, C.J., & Guerrieri, L. (2011). Oil shocks and external adjustment. Journal of International Economics, 83(2), 168–184.
  • Chen, S. (2009). Oil price pass-through into inflation. Energy Economics, 31(1), 126–133.
  • Chou, K.W. & Tseng, Y.H. (2011). Pass-Through of Oil Prices to CPI Inflation in Taiwan. International Research Journal of Finance and Economics, 69, 73-83.
  • Colongi, A. & Manera, M. (2005). Oil Prices, Inflation and Interest Rates in A Structural Cointegrated VAR Model for the G-7 Countries, IEM (International Energy Markets) Working Cointegrated VAR Model for the G-7 Countries. IEM (International Energy Markets) Working Paper, No. (101.2005), 1-55.
  • Esmaiel Nia, A.A. & Shafiei, S. (2009). The Comparative Assessment of Differences of Oil Prices Increasing in Recent Years with Oil Price Shocks in 1970s. Journal of Economic Research and Policies, 17(50), 53-76 (In Persian).
  • Fernández-Macho, J. (2012). Wavelet multiple correlation and cross- correlation: A multiscale analysis of Eurozone stock markets. Physica A: Statistical Mechanics and its Applications, 391(4): 1097-1104.
  • Ge Z., & Sun Y. (2024), Asymmetric impact of oil price shocks on inflation: Evidence from quantile-on-quantile regression. International Review of Financial Analysis, 92, 103097.
  • Gregorio, J.D., Landerretche, O., Neilson, C., Broda, C., & Rigobon, R. (2007). Another pass-through bites the dust? Oil prices and inflation. Economía, 7 (2), 155–208.
  • Hammoudeh, S., Bhar, R., & Thompson, M.A. (2010). Re-examining the dynamic causal oil–macro-economy relationship. Rev. Financ. Anal. 19 (4), 298–305
  • Hooker, M.A. (2002). Are oil shocks inflationary? Asymmetric and nonlinear specifications versus changes in regime. Money Credit & Bank, 34 (2), 540–561.
  • Jiang, C., Chang, T., & Li, X.L., (2015). Money growth and inflation in China: new evidence from a wavelet analysis. Rev. Econ. Finance, 35, 249–261.
  • Komijani, A. & Haji Heidari, A. (2024), Asymmetric Effects of Oil Price Shocks, Oil Price Uncertainty and Economic Sanctions on Economic Growth and Inflation in Iran. Journal of Economic Studies and Policies, 10(20), 189-218 (In Persian).
  • Lucas, R. (1980). Two illustrations of the quantity theory of money. American Economic Review, 70, 1005–1014.
  • Mehnatfar, Y., Bradaran Khanian, Z., & Azari, Z. (2018). Oil Price Shocks and Inflation in Iran: Quantile Regression Approach. Energy Policy and Planning Research, 4(1), 171-191 (In Persian).
  • Mehrara, M., & Bayat, S. (2010). The Non-Linear Effects of Oil Revenues on Inflation in OPEC Countries Using the Threshold Approach. Journal of Economic Policies, 6(1), 107-124 (In Persian).
  • Negro, M.D., & Primiceri, G.E. (2005). Time-varying structural vector autoregressions and monetary policy: a corrigendum. Review of Economic Studies Ltd, 72 (3), 821–852.
  • Samadi, S., Yahyaabadi, A., Moalemi, N. (2009). Analysis of the impact of oil price shocks on macroeconomic variables in Iran. Journal of Economic Studies and Policies, 7(52), 5-26 (In Persian).
  • Taheri Bazkhaneh, S. & Keshavarz, H. (2023). Time-frequency Analysis of Monetary Policy Response to Output Gap and Inflation Deviation in Iranian Economy. Quarterly Journal of Economics and Modelling, 14(1), 133-162 (In Persian).
  • Živkov, D., Uraskovic, J., & Manic, S., (2019). How do oil price changes affect inflation in central and eastern European countries? A wavelet-based Markov switching approach. J. Econ. 19 (1), 84–104.
  • Zhu, H.M., Li, S.F., & Yu, K. (2011. Crude oil shocks and stock markets: A panel threshold cointegration approach. Energy Econ. 33(5), 987–994.