(Luận văn) the impact of oil price on inflation the case of vietnam

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES t to HO CHI MINH CITY THE HAGUE ng VIETNAM THE NETHERLANDS hi ep w n VIETNAM - NETHERLANDS lo ad PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ju y th yi pl n ua al THE IMPACT OF OIL PRICE ON INFLATION n va THE CASE OF VIET NAM ll fu oi m A thesis submitted in partial fulfilment of the requirements for the degree of at nh MASTER OF ARTS IN DEVELOPMENT ECONOMICS z z By vb TRUONG NGO TRONG NGHIA k jm ht om l.c DR NGUYEN VAN NGAI gm Academic Supervisor: an Lu n va HO CHI MINH CITY, NOVEMBER 2012 ey t re Acknowledgement t to ng hi Over two years not so long but it is one of the most interesting periods of my life ep with many impressive memories I would like to take this opportunity to express my w deep gratitude to the Vietnam-Netherlands Master Program for Economics of n lo Development for organizing many helpful and exciting curriculums ad For the completion of this thesis, I have indebted to many people who have given y th me their continued support, advice and guidance ju yi First of all, I would like to express my sincere gratitude to my supervisor Dr pl Nguyen Van Ngai who gave me valuable guidelines, comments, suggestions, and al n ua inspiration for the successful completion of this study Besides, his friendly and n va thoughtful instructions have given me a great deal of encouragements to overcome fu difficulties in the whole research process ll I am also thankful to Dr Nguyen Trong Hoai, Dr Nguyen Hoang Nam, Dr Tu Van m oi Binh, MBA Ly Thi Minh Chau, Tutor-Mr Phung Thanh Binh and all lecturers and nh at program administrators in the Vietnam – The Netherlands Program for M.A in z Development Economics They gave me advanced knowledge and help me kindly z ht vb during the course jm I would like to express my heartfelt thank to all my classmates in MDE15, MDE16, k especially Tran Tuyet Hanh, Tran Van Long, Le Trong Binh, Vo Thi Ngoc Trinh, gm l.c Le Anh Khang, Nguyen Van Dung, Nguyen Xuan Phap, Nguyen Le Thao Nguyen and other classmates for their continuous support and encouragement om Last but not least, I would like to express my deepest thanks to my parents, my an Lu brother, my close friends who have always given the most favorable environment n va and kept encouraging me that made me feel more confident during my study ey t re ii Certification t to ng hi “I certify that the content in this thesis has not already been submitted for any ep degree and has not submitted for any other degree until now w I certify that this thesis is done from the best of my knowledge All the aids that I n lo received during the time in preparing the thesis as same as all sources used have ad been acknowledged in my thesis.” ju y th yi Signature pl ua al n Truong Ngo Trong Nghia va n Date: / / 2012 ll fu oi m at nh z z k jm ht vb om l.c gm an Lu n va ey t re iii Abstract t to A steep upward trend in the price of crude oil in recent years, reaching a spike ng hi record in middle of 2008, has led to increasing concern about its impacts on ep macroeconomic, both abroad and in Vietnam In this study, using the vector auto regression approach (VAR) with monthly dataset from 2001M1 to 2010M10, I w n lo attempt to empirically investigate the dynamic effects of oil price and Vietnam ad macroeconomics Focusing on the reduced-form of causal relationships between y th world oil price (expressed in Vietnamese price) and macroeconomic variables, I ju yi have used both linear and non linear form of oil prices to get the results of their pl impact on price level and output In empirical analysis, I find consistent evidence al n ua that oil price shocks have a significant effect on output and price level in short term va In detail, my research finds a weak and positive statistically significant association n between oil price shocks and price level The output is more highly sensitive and I fu ll find an empirical evidence about the negative impact of oil price shocks on m oi economic growth although it’s not straight forward I also assert the existence of nh at asymmetric impact of oil price proxies’ changes on economic growth rate z z ht vb jm Key words: inflation, GDP, oil price shock, VAR models, Cointegration, Granger k causality, Phillips curve om l.c gm an Lu n va ey t re iv TABLE OF CONTENTS Acknowledgement ii t to List of Tables ng hi List of Figures ep List of Acronyms w n Chapter 1: Introduction lo ad 1.1 Problem statement y th ju 1.2 Research Objectives yi pl 1.3 Research Questions al n ua 1.4 Scope and methodology of the Study va 1.5 Thesis structure 10 n fu ll Chapter 2: Literature Review 11 oi m 2.1 Review oil shocks in history 11 at nh 2.1.1 Suez Crisis in period 1956-1957 14 z z ht vb 2.1.2 OPEC Embargo in 1973-1974: 14 k jm 2.1.3 Iranian revolution and oil price fluctuation in 1979 15 l.c gm 2.1.4 Iran-Iraq War in 1980-1981 15 2.1.5 The great price collapse in 1981-1986 15 om 2.1.6 First Persian Gulf War in 1990-1991 16 an Lu 2.1.7 The downtrend of oil price in 2001 16 ey t re 2.2.1 Why oil shock seems to be the big economic headache 18 n 2.2 How higher oil prices affect the economy 18 va 2.1.8 Growing demand and stagnant supply 17 2.2.2 The scenario of oil price and inflation in Vietnam 21 2.3 Review price level and inflation theories 22 t to ng 2.4 The transmission mechanism of oil price shocks 25 hi ep 2.5 Approaches to estimate oil impact on macro economy variables 30 2.6 Empirical studies about the oil price-macroeconomic relationship 32 w n lo 2.7 Conceptual Framework 44 ad ju y th Chapter 3: Model Specification and Data 45 3.1 Analytical Framework 45 yi pl 3.2 Model Specifications 46 ua al n 3.3 Steps of Estimation 50 va n 3.3.1 Descriptive statistics 50 fu ll 3.3.2 Unit root testing 50 oi m at nh 3.3.3 Granger Causality Test 51 z 3.3.4 Impulse response functions 53 z jm ht vb 3.3.5 Variance decomposition 53 3.4 Data Sources 53 k gm Chapter 4: The impact of oil price on inflation-the case of Vietnam 56 l.c 4.1 Descriptive Statistics 56 om an Lu 4.2 Unit Root Test 57 4.3 Var Granger Causality Test 58 ey 4.6 Result comparisons 70 t re 4.5 Asymmetric Impacts 65 n va 4.4 Impulse Responses and Variance Decompositions 61 Chapter 5: Conclusion and Policy Implication 73 5.1 Conclusions 73 t to ng 5.2 Policy Implication 75 hi ep 5.3 Limitation and Further Studies 78 5.3.1 Limitation 78 w n lo 5.3.2 Further Studies 79 ad ju y th References 81 Appendix 88 yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm an Lu n va ey t re List of Tables t to Table 2.1: Summary results of empirical studies 40 ng hi Table 3.1 The definition of variables in the model 55 ep Table 4.1: Description statistic of key variables 56 w n Table 4.2: Augment Dickey-Fuller test 57 lo ad Table 4.3: Philips-Perron test 58 y th ju Table 4.4: Optimal lag length 59 yi pl Table 4.5: VAR Granger- CausalityTest 60 al n ua Table 4.6: Variance Decompositions for Var Model 62 n va Table 4.7: Granger causality test of proxies of oil price shocks 65 ll fu Table 4.8: Accumulated Response of PC_IP_SA to non-linear oil price shocks 68 oi m at nh z z k jm ht vb om l.c gm an Lu n va ey t re List of Figures t to ng Figure 2.1: Price of oil in 2009 dollars, 1973:M1-2010:M10 Price of West Texas hi ep Intermediate deflated by CPI (Hamilton, 2011) 12 Figure 2.2: The natural logarithm of the real price of oil, 1861-2009, in 2009 U.S w n lo dollars 12 ad ju y th Figure 2.3: When oil prices head up, the US turns grey: the oil market and US yi recessions 18 pl ua al Figure 2.4: Illustration of oil price and macroeconomic variables in level 21 n Figure 2.5: Factor contributions of price level 23 va n Figure 2.6: Cost-push inflation in the AS-AD model 24 ll fu oi m Figure 2.7: Demand-pull inflation in the AS-AD model 25 at nh Figure 2.8: Two round effects of oil price increases 26 z Figure 2.9: Mix transmission channels of oil price shocks 27 z vb jm ht Figure 2.10: Conceptual framework 44 Figure 4.1: The relationships of variables 60 k gm Figure 4.2: The impulse response functions for basic model 62 l.c om Figure 4.3: The variance decompositions of variables 64 an Lu Figure 4.4: The impulse response functions of output to negative oil price changes 66 n va Figure 4.5: The impulse response functions of price level to net oil price increase 69 ey t re List of Acronyms t to ng AIC: Akaike Information Criterion hi ep AR: Autoregressive ARCH: Autoregressive Conditional Heteroskedasticity w CPI: Consumer Price Index n lo GARCH: Generalized Autoregressive Conditional Heteroskedasticity ad y th INF: Inflation ju OLS: Ordinary least squares yi OPEC: Organization of Petroleum Exporting Countries pl ua al PPI: Producer Price Index n SBV: State Bank of Vietnam n va SC: Schwartz criterion ll fu UK: the United Kingdom oi at nh VAR: Vector Auto Regressive m US: the United States of America WTI: West Texas Intermediate z z k jm ht vb om l.c gm an Lu n va ey t re