Do global oil prices drive domestic food prices? : evidence from the Middle East countries

Abstract: This study investigates the dynamic relationship between global oil prices and domestic food prices across 11 countries of the Middle East. Using monthly data covering the period from January 2010 to October 2018, the study employs long-run cointegration tests, vector error correction model (VECM) and vector autoregression (VAR) model to examine the effect of global oil prices on domestic food prices in a sample of Middle East countries. The results of panel cointegration tests revealed that there is a long-run relationship between global oil and domestic food prices. Panel VECM along with Granger causality tests showed that in the short-run there is no significant causality running from oil to food prices, while in the long-run global oil prices positively affect domestic food prices. At the country level, the empirical findings provide inconclusive evidence on the impact of global oil prices on domestic food prices in the region. While Johansen cointegration tests showed long-run relationship between oil and food prices for Bahrain, Egypt and Kuwait, VECM indicated long-run positive and significant oil price transmission only for Bahrain and Egypt. The short-run parameters obtained through VAR and Granger causality tests revealed positive and significant oil price causality on domestic food prices for Bahrain and Saudi Arabia with lesser impact in Lebanon, Qatar and Turkey. The findings provide some policy implications, such as reconsideration of current food subsidies and price controls, tackling domestic issues related to logistics and infrastructure by improving transportation system and supply chains, as well as maintaining trade diversification within and outside the Middle East region. The paper contributes to the literature on dynamics of commodity prices and global-to-local price transmission in the as understanding of the relationship and the ability to make a prognosis is of a significant importance for policymakers when formulating future fuel and food policies, and for researchers and economic agents when analysing price forecasts and strategies.