How do oil and gas prices affect Greece's domestic inflation?

Abstract

This dissertation examines the relationship between oil and gas price changes and the Greek domestic inflation along with the existence or absence of any asymmetries of such relationship during periods of increasing and decreasing oil and gas prices. This paper focuses on a 10 year period, from 2012 until 2022, covering some challenging events for the global economy, such as the COVID-19 pandemic and the invasion of Russia in Ukraine. For the purposes of the main topic of this paper, we first use the ADF and KPSS tests to point out any non-stationarity issues between our variables. Then we estimate our model with the use of an ARMA model specification. The results reveal that increasing oil and gas prices have a positive impact on the Greek CPI with a lag and PPI contemporaneously. We then implement a non-linear specification model that includes a set of dummy variables, capturing the upward and downward fluctuations of the global oil and gas prices. The results point out the existence of a positive asymmetry between oil price changes and the Greek domestic inflation. In greater detail, there is a positive relationship between oil price changes and the Greek domestic inflation, which is larger during periods of decreasing oil prices. Another asymmetric relationship is identified among gas prices and the Greek PPI and CPI. Periods when gas prices increase result in a small increase of Greek national inflation, while there is no effect among the variables during periods of decreasing gas prices. As a final proposition, this paper suggests a number of policies that the Greek government could use to protect the country’s households and businesses against future global oil price increases.