The Impact of Oil Prices on Inflation: The Case of Azerbaijan

Abstract

This paper investigates the relationship between ination, oil prices and exchange rate in Azerbaijan using the vector error correction model (VECM) to the data ranging from 1995 to 2017. The results from cointegration method conrm the existence of a long-run relationship among the variables. Moreover, estimation results of VECM show that the oil prices and exchange rate have positive and statistically signicant impact on ination in the long-run. This implies that 1% increase in oil prices and exchange rate increases ination by 0.58% and 1.81%, respectively. The results of the study also reveal that ination is observed during the periods of both high and low oil prices, and the exchange rate acts as the transmission channel from oil prices to ination.