The Impact of Oil Prices on Inflation and GDP in Sri Lanka: An Econometrics Approach using EViews

Abstract

The study seeks to measure the influence of world oil prices on inflation and GDP in Sri Lanka using monthly data from 2000M01 to 2020M12. All variables are integrated in the same order and satisfy the precondition of the Johansen cointegration test, according to the Augmented Dickey Fuller unit root, Philips and Perron unit root, and Correlogram tests. There is a long-run association between oil price, inflation, and GDP, according to the Johansen cointegration test. Then, using Vector Error Correction Model (VECM), it was discovered that while there is a long-run causal relationship between oil prices and inflation, there is no short-run causal association. There is also a long-run causality from oil prices to GDP, but no short-run connection. Inflation granger causes GPD, and oil price granger causes inflation rate, according to the Granger causality test. The results of a variance decomposition analysis revealed that oil price shocks have little impact on inflation fluctuations, both in the short and long run. In the short run, an increase in oil prices will not have much of an impact on GDP fluctuations, but in the long run, an increase in oil prices will have a significant impact on GDP fluctuations.