The impact of oil price on inflation - The case of Vietnam

Abstract

A steep upward trend in the price of crude oil in recent years, reaching a spike record in middle of 2008, has led to increasing concern about its impacts on macroeconomic, both abroad and in Vietnam. In this study, using the vector auto regression approach (VAR) with monthly dataset from 2001M1 to 2010M10, I attempt to empirically investigate the dynamic effects of oil price and Vietnam macroeconomics. Focusing on the reduced-form of causal relationships between world oil price (expressed in Vietnamese price) and macroeconomic variables, I have used both linear and non linear form of oil prices to get the results of their impact on price level and output. In empirical analysis, I find consistent evidence that oil price shocks have a significant effect on output and price level in short term. In detail, my research finds a weak and positive statistically significant association between oil price shocks and price level. The output is more highly sensitive and I find an empirical evidence about the negative impact of oil price shocks on economic growth although it’s not straight forward. I also assert the existence of asymmetric impact of oil price proxies’ changes on economic growth rate.