Examining the Impact of Oil Prices and Economic Policy Uncertainty on Inflation: A Novel Wavelet Quantile Transformation Approach

Document Type : Research Paper

Authors

1 PhD student in Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran

2 Professor, Department of Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran

3 Associate Professor (Senior Lecturer) in Finance at University of Exeter, Exeter, Devon, United Kingdom

4 Professor, Department of Economics, Faculty of Literature and Humanities, Ilam University, Ilam

Abstract

This study examines the effect of oil prices and economic policy uncertainty on inflation over the period 2008 to 2023. The main objective of this research is to analyze the complex dynamics between these variables over different time horizons and under different market conditions (such as bull and bear markets). In this study, the wavelet quantile transformation method is used and the effect of oil prices and economic policy uncertainty on the distribution of inflation over different time horizons is simultaneously examined; the use of quantile transformation allows for a more detailed analysis of the relationships between variables over different time horizons and shows that the impact of economic and policy shocks on inflation is different in different quantiles. The results show that oil prices have a significant impact on inflation, but this impact is different in the short, medium and long term. The impact of oil prices on inflation is greater in the short term and decreases over time. Economic policy uncertainty also has a significant effect on inflation, especially when the market is facing high policy volatility. This effect is particularly pronounced in the upper quantiles (i.e., when inflation is at higher levels). Using the quantile wavelet transform has allowed researchers to more accurately analyze the relationships between variables over different time horizons and under different market conditions. This method shows that the impact of economic and policy shocks on inflation varies across quantiles. The results of this study help economic policymakers better understand the effects of key variables such as oil prices and economic policy uncertainty on inflation and adopt more effective strategies in the face of these challenges.

Keywords

Main Subjects

References

  1. Abdi Seyyedkolaee, M., Tehranchian, A. M., Jafari Samimi, A., & Favero, G. (2022). Non-linear response of inflation: A real effective exchange rate in Iran. Quarterly Journal of Quantitative Economics (JQE), 19(1), 53-71 (In Persian).
  2. Adebayo, T. S., & Özkan, O. (2024). Investigating the influence of socioeconomic conditions, renewable energy and eco-innovation on environmental degradation in the United States: A wavelet quantile-based analysis. Journal of Cleaner Production, 434, 140321.
  3. Adeosun, O. A., Tabash, M. I., Vo, X. V., & Anagreh, S. (2023). Uncertainty measures and inflation dynamics in selected global players: a wavelet approach. Quality & Quantity, 57(4), 3389-3424.
  4. Ahir, H., Bloom, N., & Furceri, D. (2022). The world uncertainty index(No. w29763). National bureau of economic research.
  5. Akbari, S., Arman, S. A., & Ahangari, A. (2025). Oil, Metal, and Agricultural Raw Material Prices in Global Markets and the Iranian Economy. Economic Research and Perspectives, 25(1), 139-158 (In Persian).
  6. Al-Thaqeb, S. A., & Algharabali, B. G. (2019). Economic policy uncertainty: A literature review. The Journal of Economic Asymmetries, 20, e00133.
  7. Ashena, M., Khezri, H. L., & Shahpari, G. (2023). Investigation into the dynamic relationships between global economic uncertainty and price volatilities of commodities, raw materials, and energy. Applied Economic Analysis, (ahead-of-print).
  8. Anderl, C., & Caporale, G. M. (2023). The asymmetric impact of economic policy and oil price uncertainty on inflation: Evidence from developed and emerging economies.
  9. Aron, J., Macdonald, R., & Muellbauer, J. (2014). Exchange rate pass-through in developing and emerging markets: A survey of conceptual, methodological and policy issues, and selected empirical findings. Journal of Development Studies, 50(1), 101-143.
  10. Aytaç, D., & Saraç, T. B. (2022). Economic Policy Uncertainty, Interest Rates And Inflation: Evidence From Selected Latin American Emerging Markets. JOEEP: Journal of Emerging Economies and Policy, 7(2), 578-590.
  11. Bloom, N. (2009). The impact of uncertainty shocks. Econometrica, 77(3), 623–685.
  12. Canepa, A. (2024). Inflation dynamics and persistence: The importance of the uncertainty channel. The North American Journal of Economics and Finance, 72, 102135.
  13. Charnavoki, V., & Dolado, J. J. (2014). The effects of global shocks on small commodity-exporting economies: lessons from Canada. American economic journal: Macroeconomics, 6(2), 207-237.
  14. Chernozhukov, V., Fern´ andez-Val, I., Melly, B., (2013). Inference on counterfactual distributions. Econometrica, 81 (6), 2205–2268.
  15. Choi, S., Furceri, D., Loungani, P., Mishra, S., & Poplawski-Ribeiro, M. (2018). Oil prices and inflation dynamics: Evidence from advanced and developing economies. Journal of International Money and Finance, 82, 71-96.
  16. Ding, S., Zheng, D., Cui, T., & Du, M. (2023). The oil price-inflation nexus: The exchange rate pass-through effect. Energy Economics, 125, 106828.
  17. Fathi, S, Nunezhad, M, Zare, H and Haghighat, A. (2013). Studying the asymmetric effects of oil price shocks and real exchange rate volatility on economic growth and inflation in selected member countries of the Islamic Conference: EGARCH behavior. Economics and Regional Development, 25, 250-290 (In Persian).
  18. Husaini, D. H., & Lean, H. H. (2021). Asymmetric impact of oil price and exchange rate on disaggregation price inflation. Resources Policy, 73, 102175.
  19. Husaini, D. H., Puah, C. H., & Lean, H. H. (2019). Energy subsidy and oil price fluctuation, and price behavior in Malaysia: A time series analysis. Energy, 171, 1000-1008.
  20. Irfan, M., Chen, Z., Adebayo, T. S., & Al-Faryan, M. A. S. (2022). Socio-economic and technological drivers of sustainability and resources management: demonstrating the role of information and communications technology and financial development using advanced wavelet coherence approach. Resources Policy, 79, 103038.
  21. Kang, W., & Ratti, R. A. (2013). Oil shocks, policy uncertainty and stock market return. Journal of International Financial Markets, Institutions and Money, 26, 305–318.
  22. Komijani, A and Haji-Heidari, A. (2013). The asymmetric effect of oil prices, oil price uncertainty and economic sanctions on economic growth and inflation in Iran. Journal of Economic Studies and Policies, 20, 189-218 (In Persian).
  23. Koenker, R., Bassett, G., (1978). Regression quantiles. Econometrica, 46 (1), 33–50.
  24. Kumar, A. S., & Padakandla, S. R. (2022). Testing the safe-haven properties of gold and bitcoin in the backdrop of COVID-19: A wavelet quantile correlation approach. Finance research letters, 47, 102707.
  25. Kyriazis, N., Papadamou, S., Tzeremes, P., & Corbet, S. (2024). Examining spillovers and connectedness among commodities, inflation, and uncertainty: A quantile-VAR framework. Energy Economics, 133, 107508.
  26. Lal-Khedri, H and Ashna, M. (2013). Studying the dynamic relationship between global economic policy uncertainty and inflation and inflationary uncertainty in Iran. Modern Economics and Trade, 18(1), 149-171 (In Persian).
  27. Liu, X., Adebayo, T. S., Ramzan, M., Ullah, S., Abbas, S., & Olanrewaju, V. O. (2023). Do coal efficiency, climate policy uncertainty and green energy consumption promote environmental sustainability in the United States? An application of novel wavelet tools. Journal of Cleaner Production, 417, 137851.
  28. Long, S., Li, J., & Luo, T. (2023). The asymmetric impact of global economic policy uncertainty on international grain prices. Journal of Commodity Markets, 30, 100273.
  29. Ma, F., Lu, X., Wang, L., & Chevallier, J. (2021). Global economic policy uncertainty and gold futures market volatility: Evidence from Markov regime‐switching GARCH‐MIDAS models. Journal of Forecasting, 40(6), 1070-1085.
  30. Machado, J. A. F., & Silva, J. S. (2005). Quantiles for counts. Journal of the American Statistical Association, 100(472), 1226-1237.
  31. Madanian, B. (2018). Inflation spillover and uncertainty of producer and consumer inflation in the Iranian economy. Quarterly Journal of Financial and Economic Policies, 6(22): 69-92. (In Persian)
  32. Mehanetfar, Y, Baradaran Khanian, Z and Azari, Z. (2018). The effect of oil price shocks on inflation in the Iranian economy: A quantile regression approach. Quarterly Journal of Energy Policy and Planning Research, 4(10), 171-191 (In Persian).
  33. Neanidis, K. C., & Savva, C. S. (2013). Macroeconomic uncertainty, inflation and growth: Regime-dependent effects in the G7. Journal of Macroeconomics, 35, 81-92.
  34. Olanipekun, I. O., Ozkan, O., & Olasehinde-Williams, G. (2023). Is renewable energy use lowering resource-related uncertainties?. Energy, 271, 126949.
  35. Percival, D. B., & Walden, A. T. (2000). Wavelet methods for time series analysis(Vol. 4). Cambridge university press.
  36. Pham, T. A. T., Nguyen, T. T., Nasir, M. A., & Huynh, T. L. D. (2023). Exchange rate pass-through: A comparative analysis of inflation targeting & non-targeting ASEAN-5 countries. The Quarterly Review of Economics and Finance, 87, 158-167.
  37. Pirpour, H., & Samsami Mazrae Akhoond, H. (2024). Evaluating the impact of exchange rate fluctuations on core inflation using the Mandel-Fleming stochastic model and identifying the mutual relationship between exchange rate fluctuations and inflation deviations in Iran. Quarterly Journal of Quantitative Economics (JQE) (In Persian).
  38. Ren, Y. S., Klein, T., Jiang, Y., Ma, C. Q., & Yang, X. G. (2024). Dynamic spillovers among global oil shocks, economic policy uncertainty, and inflation expectation uncertainty under extreme shocks. Journal of International Financial Markets, Institutions and Money, 91, 101951.
  39. Umar, M., Ji, X., Kirikkaleli, D., & Xu, Q. (2020). COP21 Roadmap: Do innovation, financial development, and transportation infrastructure matter for environmental sustainability in China?. Journal of environmental management, 271, 111026.
  40. Wang, Q., & Weng, C. (2024). Two-way risk: Trade policy uncertainty and inflation in the United States and China. Finance Research Letters, 62, 105154.
  41. Wen, J., Khalid, S., Mahmood, H. and Zakaria, M., (2021). Symmetric and asymmetric impact of economic policy uncertainty on food prices in China: a new evidence. Resources Policy, 74, p.102247.
  42. Yolanda, Y. (2017). Analysis of Factors Affecting Inflation and its Impact on Human Development Index and Poverty in Indonesia. European Research Student, XX(4B), 38-56.
Applied Theories of Economics
Volume 12, Issue 4 - Serial Number 47
December 2025
Pages 97-122

Files

Share

How to cite

Statistics