Oil Price Shocks, Inflation Thresholds, and Macroeconomic Dynamics in a Developing Economy: A Regime-Based Analysis

Abstract

This study examines how inflation regimes and structural policy periods shape the macroeconomic consequences of global oil price shocks in an oil-dependent developing economy from 1987Q1 to 2023Q4. It investigates threshold dependence in the inflation–growth relationship, decomposes oil price shocks and traces their transmission across policy regimes, and assesses whether causality varies across short-run, business-cycle, and long-run frequency horizons. The analysis applies a threshold structural vector error correction model (TSVEC), a structural vector error correction model (SVEC) with Cholesky identification, and the Breitung–Candelon (2006) frequency-domain causality test. Quarterly data on GDP growth, consumer price inflation, Brent crude oil prices, the real effective exchange rate, and lending interest rates were obtained from the World Bank API, the IMF International Financial Statistics, and the U.S. Energy Information Administration. The findings indicate a pronounced nonlinear inflation–growth relationship: mean GDP growth is 5.12% in the low-inflation regime, compared with 2.02% in the high-inflation regime, while the speed of adjustment toward long-run equilibrium approximately doubles under high inflation. Regime-conditional impulse responses further indicate that the peak GDP response to oil price shocks during the post-crash period (2015–2023) exceeds that observed during the boom period (2003–2014) by more than threefold, a finding attributed to eroded fiscal buffers. These results highlight the role of policy regime quality and inflation management capacity in mediating oil shock transmission. The study contributes a regime-sensitive account of macroeconomic adjustment in an oil-dependent developing economy and supports strengthening inflation-targeting frameworks and countercyclical fiscal stabilisation mechanisms.