The Impact of Change in Oil Price on Inflation in Norway

Abstract

In this thesis, I investigated the effect of oil price fluctuation on consumer price inflation in Norway. I applied the vector autoregression (VAR) model – one of the most popular approach in macroeconomic multivariate time series analysis. I added interest rate and exchange rate to the model in addition to oil price and consumer price index. I collected monthly data for a sample period from 2001 to 2016, also 180 observation for each variable. I conducted Granger causality test beside VAR in order to detect short run causality from oil price to inflation. The results indicated that change in oil price has indeed caused change in inflation in the short run, but the effect is very limited. I conducted stability test and system was stable. There is no autocorrelation, but the normality test shows that residuals are not normally distributed. It implies that model has some weaknesses, therefore, results need cautious consideration.