Yemen’s Inflation Asymmetric Response to Oil Price Shocks

Abstract

Like other oil-reliant economies, Yemen's economy is vulnerable to oil price shocks. This study examines the asymmetric responses of Yemen's inflation rate to oil price shocks starting right after unification in 1991 to 2022. To this end, the Nonlinear autoregressive distributed lag (NARDL) and Augmented ARDL applied to NARDL rather than ARDL (bootstrap NARDL) are used for the analysis. Overall findings found that negative oil price shocks following oil price decline have a bigger impact on inflation compared to positive ones resulting from rising oil prices. Moreover, the Augmented NARDL results found that inflation and oil price shocks have an asymmetric cointegration. The results of NARDL indicate that the inflation rate (INFY) exhibits short-term asymmetric impact in response to negative shocks only but is insignificant yet positive to both shocks in the long term. The study suggests that Existing strategies, such as expanding the money supply, have proven unsuccessful, exacerbating inflation and encouraging illicit economic activities. The government is advised to implement strict monetary regulations through the Central Bank of Yemen, including tightening monetary policy to bring stability to currency markets and reduce inflation. Proper implementation and supervision of these measures are crucial for achieving economic stability.