Panel threshold effect of oil price changes on monetary policy: Empirical evidence from oil importing versus oil exporting countries

Many studies have shown the impact of the changes of oil price on the global economy. The main objective of this study is to examine the impact of oil price changes and other non – oil factors on monetary policy behaviour and decision empirically. Generally, this study investigates the monetary policy reaction of oil importing versus oil exporting countries in response to the threshold effect of oil price changes and inflation. An advanced panel threshold regression is employed to study the money policy reaction function for the quarterly period from 1999 to 2016. For oil exporting countries, our results revealed that the existence of double – threshold effect of the oil price changes and inflation on monetary policy reaction. Also, results capture that the threshold effects of inflation and changes of oil price in determining the monetary policy reaction in both groups of countries. In both cases, higher inflation triggers to expansionary policy in which oil exporting exhibits a higher threshold inflation rate (4.63% and 16.37%) compared to oil importing countries (1.11% and 4.97%). On the other hand, oil price changes imposed a higher threshold impact on monetary policy among oil exporting countries compared to the oil importing countries. The results imply both oil and non-oil inflation are the main policy concern in oil exporting countries. However, non-oil (consumer price) inflation is the only concern of policy reaction in oil importing countries.