Decomposing Oil Price Shocks to East Africa’s Inflation Expectation
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Keywords
Oil price;, shocks, Impulse Response Functions (IRF), FEVD, fluctuation
Abstract
East Africa stands at the crossroads of economic development, with its burgeoning nations poised for growth and integration into the global economy. However, the region faces a serious challenge in the form of oil price shocks, the repercussions of which permeate various sectors, casting a shadow on economic stability. The current empirical study analyses the effects of oil price shocks on inflation in the East African countries. The study adopted Structural Vector Autoregressive modelling of the time series to assess the relationship between oil price fluctuations and inflation trends as observed in east African, utilizing time series annual data from 1990 to 2022. The finding of the study were that there exists a Bi-Direction causality between oil price fluctuations and inflation in the three East African countries, the SVAR estimation confirmed positive significant effect of oil price fluctuation on inflation trends, the results of the IRF pointed out oil price fluctuation affect the East Africa’s inflation performance and finally the FEVD of oil price fluctuation on inflation reflected that there exist indirect effects of oil price fluctuation on inflation as well as inflation influencing oil price after the third period. Based on these findings we therefore conclude that crude oil price fluctuations contribute significantly to the real inflation in the East African countries and hence affecting other sectors of the economy inversely. It is on this ground that we recommend adoption of policies that will reduce this effect on these countries, to start with to reduce the burden the countries should look for alternative locally available source of power that include adoption of Bidiesel, compressed methane that can be source from sugar cane give the un tapped potential of sugar can in the three countries. In addition, the countries can consider price hedging of oil purchases where the countries enter into contract with their oil supplies for a constant crude oil price over the contract period.
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Samwel Cheruiyot Kotut, Department of Economics School of Business and Economics, Moi University, P.o Box 3900-30100 Eldoret Kenya
Department of Economics School of Business and Economics, Moi University, Kenya
Brenda Khisa Nato , Department of Economics School of Business and Economics, Moi University, P.o Box 3900-30100 Eldoret Kenya
Department of Economics School of Business and Economics, Moi University, Kenya