A New Exploration of the Effects of Oil Price Uncertainty and Economic Policy on Inflation: Modeling with Quantile-on-Quantile

Document Type : Research Paper

Authors

1 PhD Student in Economics, Urmia University

2 Professor of Economics Department of Economics Urmia University, Urmia Iran

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

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

Abstract

Objective: This study investigates the asymmetric effects of Economic Policy Uncertainty (EPU) and Oil Price Uncertainty (OPU) on inflation in Iran, using the Quantile-on-Quantile (QQ) regression method. Given Iran's oil-dependent economy, the research aims to understand how global and domestic uncertainties impact inflation dynamics, particularly during economic turbulence. Traditional models often neglect the non-linear and heterogeneous effects of uncertainty on inflation, prompting the use of the QQ approach to capture the varying impacts across different quantiles.
Methods: The study employs the QQ regression method to analyze the asymmetric effects of EPU and OPU on inflation, using monthly data from 2008 to 2023. The QQ approach is chosen to address the heterogeneity and non-linearity in the relationship between uncertainty and inflation, particularly in the context of Iran's oil-driven economy.

Results: The findings reveal significant heterogeneity in inflation responses to uncertainty shocks. At lower quantiles, both EPU and OPU have minimal effects on inflation, indicating that minor changes in uncertainty do not significantly alter inflation rates. However, at higher quantiles—especially during periods of heightened uncertainty—both factors show a more pronounced and positive effect on inflation. Additionally, the QQ analysis indicates that EPU has a more consistent impact on inflation compared to OPU, suggesting that policy-induced uncertainty exerts greater pressure on price levels than oil price volatility. Conclusions: The study highlights the importance of accounting for asymmetric and quantile-dependent uncertainty effects when formulating inflation control policies, as this can help address inflationary challenges in the face of fluctuating global and domestic conditions.

Keywords

References

  1. Abiad, A., & Qureshi, I. A. (2023). The macroeconomic effects of oil price uncertainty. Energy Economics, 125, 106839.
  2. 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.
  3. Ahir, H., Bloom, N., & Furceri, D. (2022). The world uncertainty index(No. w29763). National bureau of economic research.
  4. Athari, S.A., Kirikkaleli, D., Yousaf, I., Ali, S. (2021). Time and frequency co-movement between economic policy uncertainty and inflation: evidence from Japan. J. Public Aff.
  5. Ashiru, Y., & Oladele, L. (2023). Impact of Economic Policy Uncertainty on Inflation in Nigeria: Evidence from ARDL Model. Available at SSRN 4481113.‏
  6. 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.
  7. Al-Thaqeb SA, Algharabali BG (2019) Economic policy uncertainty: A literature review. J Econ Asymmetries 20:e00133
  8. Ali IM (2020) Asymmetric impacts of oil prices on inflation in Egypt: A nonlinear ARDL approach. J Dev Econ Policies 23(1):5–28
  9. Antonakakis, N., Chatziantoniou, I., & Filis, G. (2014). Dynamic spillovers of oil price shocks and economic policy uncertainty. Energy Economics, 44, 433-447.
  10. Anderl, C., & Caporale, G. M. (2023). Asymmetries, uncertainty and inflation: evidence from developed and emerging economies. Journal of Economics and Finance, 47(4), 984-1017.
  11. Anderl, C., & Caporale, G. M. (2023). The asymmetric impact of economic policy and oil price uncertainty on inflation: Evidence from developed and emerging economies.
  12. Baldini A, Poplawski-Ribeiro M (2011) Fiscal and monetary determinants of inflation in low-income countries: Theory and evidence from sub-Saharan Africa. J Afr Econ 20(3):419–462.
  13. Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The quarterly journal of economics, 131(4), 1593-1636.
  14. Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. The quarterly journal of economics, 98(1), 85-106.
  15. Bloom, N. (2009). The impact of uncertainty shocks. econometrica, 77(3), 623-685.
  16. Boschi M, Girardi A (2007) Euro area inflation: long-run determinants and short-run dynamics. Appl Financ Econ 17(1):9–24
  17. Caldara, D., Conlisk, S., Iacoviello, M., & Penn, M. (2022). Do geopolitical risks raise or lower inflation. Federal Reserve Board of Governors, 1-34.
  18. Cleveland WS (1979) Robust locally weighted regression and smoothing scatterplots. J Am Stat Assoc 74(368):829–836.
  19. 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.
  20. Choi S, Furceri D, Loungani P, Mishra S, Poplawski-Ribeiro M (2018) Oil prices and inflation dynamics: Evidence from advanced and developing economies. J Int Money Financ 82:71–96.
  21. Corrêa, W. L. R., & Lopes, L. S. (2023). Monetary policy transmission, productive activity, and inflation in Brazil: Does uncertainty matter?. The Journal of Economic Asymmetries, 27, e00285.
  22. Dhakal D, Kandil M, Sharma SC, Trescott PB (1994) Determinants of the Inflation rate in the United States: A VAR Investigation. Q Rev Econ Finance 34(1):95–112
  23. Deniz P, Tekçe M, Yilmaz A (2016) Investigating the determinants of inflation: A panel data analysis. Int J Financ Res 7(2):233–246
  24. Eftekhari-Mahabadi S, Kiaee H (2015) Determinants of inflation in selected countries. J Money Econ 10(2):113–143
  25. Elder J, Serletis A (2010) Oil price uncertainty. J Money Credit Bank 42(6):1137–1159.
  26. Fathi, S, Nunezhad, M, Zare, H and Haghighat, A (2023). Investigating 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. Regional Economics and Development, 25, 250-290.
  27. Ge, Z., & Sun, Y. (2024). Asymmetric impact of oil price shocks on inflation: Evidence from quantile-on-quantile regression. International review of financial analysis, 92, 103097.
  28. Grier KB, Perry MJ (1998) On inflation and inflation uncertainty in the G7 countries. J Int Money Financ 17(4):671–689
  29. Greenidge K, DaCosta D (2009) Determinants of Inflation in Selected Caribbean Countries. J Bus Finance Econ Emerg Econ 4(2):371–397
  30. Ha, J., Kose, M. A., & Ohnsorge, F. (2019). Inflation in emerging and developing economies: Evolution, drivers, and policies. World Bank Publications.
  31. Istiak K, Serletis A (2018) Economic policy uncertainty and real output: Evidence from the G7 countries. Appl Econ 50(39):4222–4233
  32. Jo S (2014) The effects of oil price uncertainty on global real economic activity. J Money Credit Bank
  • 46(6):1113–1135.
  1. 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.
  2. Kumah SP, Mensah JO (2020) Are cryptocurrencies connected to gold? A wavelet-based quantile-in-quantile approach. Int J Financ Econ, ijfe.2342.
  3. Kilian, L., & Zhou, X. (2022). The impact of rising oil prices on US inflation and inflation expectations in 2020–23. Energy Economics, 113, 106228.
  4. Kimball, M. S. (1989). Precautionary Saving in the Small and in the Large.
  5. Köse N, Ünal E (2021) The effects of the oil price and oil price volatility on inflation in Turkey. Energy 226:120392.
  6. Koenker, R., & Bassett Jr, G. (1978). Regression quantiles. Econometrica: journal of the Econometric Society, 33-50.
  7. Koenker, R., & Ng, P. (2005). Inequality constrained quantile regression. Sankhyā: The Indian Journal of Statistics, 418-440.
  8. Komijani, A and Haji-Heidari, A (2023). 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.
  9. Lal-Khezri, H and Ashna, M (2023). Investigating the dynamic relationship between global economic policy uncertainty and inflation and inflationary uncertainty in Iran. Modern Economics and Trade, 18(1), 149-171.
  10. Lagoa S (2017) Determinants of inflation differentials in the euro area: Is the New Keynesian Phillips Curve enough? J Appl Econ 20(1):75–103
  11. Lacheheb M, Sirag A (2019) Oil price and inflation in Algeria: A nonlinear ARDL approach. Q Rev Econ Finance 73:217–222
  12. Leduc, S., & Liu, Z. (2020). The uncertainty channel of the coronavirus. FRBSF Economic Letter, 7, 1-05.
  13. Lily J, Kogid M, Nipo DT, Lajuni N (2019) Oil price pass-through into inflation revisited in Malaysia: the role of asymmetry. Malays J Bus Econ (MJBE) 2.
  14. Li Y, Guo J (2022) The asymmetric impacts of oil price and shocks on inflation in BRICS: a multiple threshold nonlinear ARDL model. Appl Econ 54(12):1377–1395
  15. Lim YC, Sek SK (2015) An examination on the determinants of inflation. J Econ Bus Manag 3(7):678–682
  16. Long S, Li J, Luo T (2022) The asymmetric impact of global economic policy uncertainty on international grain prices. J Commod Markets 100273.
  17. 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.
  18. Mohanetfar, 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.
  19. Neanidis KC, Savva CS (2013) Macroeconomic uncertainty, inflation and growth: Regime-dependent effects in the G7. J Macroecon 35:81–92.
  20. Pastor, L., & Veronesi, P. (2012). Uncertainty about government policy and stock prices. The journal of Finance, 67(4), 1219-1264.
  21. 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.
  22. Salisu, A. A., Isah, K. O., Oyewole, O. J., & Akanni, L. O. (2017). Modelling oil price-inflation nexus: The role of asymmetries. Energy, 125(15), 97–106.
  23. Shahzad SJH, Shahbaz M, Ferrer R, Kumar RR (2017) Tourism-led growth hypothesis in the top ten tourist destinations: new evidence using the quantile-on-quantile approach. Tour Manag 60:223–232.
  24. Stone CJ (1977) Consistent nonparametric regression. Ann Stat:595–620
  25. Sims, C. A. (2012). Disentangling the channels of the 2007-09 Recession: Comments and discussion. Brookings Papers on Economic Activity, (1), 141-148.
  26. Sim, N., & Zhou, H. (2015). Oil prices, US stock return, and the dependence between their quantiles. Journal of Banking & Finance, 55, 1-8.
  27. Wang Y, Xiang E, Ruan W, Hu W (2017) International oil price uncertainty and corporate investment: Evidence from China’s emerging and transition economy. Energy Econ 61:330–339
  28. Wen J, Khalid S, Mahmood H, Zakaria M (2021) Symmetric and asymmetric impact of economic policy uncertainty on food prices in China: a new evidence. Resour Policy 74:102247.
  29. Zhao, Y., Gao, X., Zheng, H., Zhang, Y., Sun, Q., Wang, A., & An, H. (2025). Identifying influence pathways of oil price shocks on inflation based on impulse response networks. Energy, 314, 134107.
  30. Živkov, D., Đurašković, J., & Manić, S. (2019). How do oil price changes affect inflation in Central and Eastern European countries? A wavelet-based Markov switching approach. Baltic Journal of Economics, 19(1), 84-104.
International Journal of Business and Development Studies
Volume 17, Issue 2
October 2025
Pages 1-27

Files

Share

How to cite

Statistics