Volume 9, Issue 2, December 2020, Page: 91-100
Trade Openness and Crude Oil Price Effects on Food Inflation: Examining the Romer Hypothesis in Kenya
Caspah Lidiema, Corporate Services Division, United Nations Environment Programme (UNEP), Nairobi, Kenya
Received: May 22, 2020;       Accepted: Jun. 8, 2020;       Published: Jun. 29, 2020
DOI: 10.11648/j.jwer.20200902.12      View  21      Downloads  21
Food Prices accounts for about 36% of the overall consumer price index in Kenya and it’s the single largest of the 12 components that make up the index. Therefore, shocks in food prices could considerably be transmitted to the overall consumer price index. While Kenya agricultural production is heavily rain-fed, external pressures from and shocks from crude oil price, international trade are transmitted inwards and pile more pressure on food prices as well. While inflation tend to follow all the available information in the market and business per the rational expectations’ theory, price factors are a key determinant of business cycles, because price stickiness tend to drive demand. Therefore, demand for food products could be driven by several market features including internal food prices, oil prices, productions and importation costs. The objective of this research was to analyze the effect of Trade openness on food inflation in Kenya with a view of establishing if Romer’s hypothesis holds in Kenya. The second objective is to establish the effect of crude oil prices on food inflation in Kenya. The study employed Autoregressive Distributed Lag (ARDL) cointegrating technique to estimate both short-run and long run estimates. The study findings indicate that trade openness significantly has a reducing influence on food inflation hence confirming the existence of Romer’s hypothesis in Kenya. Secondly, crude oil prices have a positive and significant effect on food inflation. Interestingly, the study found that money supply does not have significant influence on food inflation. The study recommends embracing and adopting international free trade agreements to further leverage on imports prices, increase buffer storage to cushion against food demand and hence stabilize food prices. Secondly the government should enhance further price controls on oil prices to reduce spillovers to food production and supply costs. In addition, Kenya should develop technologies to improve agricultural farm production to leverage dependence of rain-fed agricultural sector.
Food Inflation, Trade Openness, Crude Oil, ARDL, Short-run, Long-run, Romer
To cite this article
Caspah Lidiema, Trade Openness and Crude Oil Price Effects on Food Inflation: Examining the Romer Hypothesis in Kenya, Journal of World Economic Research. Vol. 9, No. 2, 2020, pp. 91-100. doi: 10.11648/j.jwer.20200902.12
Copyright © 2020 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Qayyum, A., & Sultana, B. (2018). Factors of food inflation: Evidence from time series of Pakistan. Journal of Banking and Finance Management, 1 (2), 23-30.
Chand, R. (2010). Understanding the nature and causes of food inflation. Economic and Political Weekly, 10-13.
Alper, M. E., Hobdari, M. N. A., & Uppal, A. (2017). Food inflation in sub-Saharan Africa: causes and policy implications. International Monetary Fund
KNBS, (2020): Consumer Price Indices and Inflation rates for December 2019, Nairobi, Kenya
Totonchi, J. (2011). Macroeconomic theories of inflation. In International Conference on Economics and Finance Research (págs. 459-462). Singapore: IACSIT Press.
Were, M., Tiriongo, S., & Secretariat, M. P. C. (2012). Central Bank’s response to economic crises from a developing African economy perspective: Lessons from Kenya’s experience. Unpublished manuscript, Central Bank of Kenya, Nairobi.
Aisen, A., & Veiga, F. J. (2005). Does political instability lead to higher inflation? A panel data analysis. International Monetary Fund.
Krušković, B. D., & Maričić, T. (2014). Empirical Analysis of the Impact of Inflation Targeting on the Risk Premium. Journal of Central Banking Theory and Practice, 3 (3), 87-99.
Finck, D., & Tillmann, P. (2019). The Role of Global and Domestic Shocks for Inflation Dynamics: Evidence from Asia (No. 201904). Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
Bhattacharya, R., & Gupta, A. S. (2015). Food inflation in India: Causes and consequences. National Institute of Public Finance and Policy, Working Paper, (2015-151).
Louw, M. (2017). An econometric analysis of food inflation in South Africa (Doctoral dissertation, University of Pretoria).
World Bank.(2018). Poverty Incidence in Kenya Declined Significantly, but Unlikely to be Eradicated by 2030. Available at https://www.worldbank.org/en/country/kenya/publication/kenya-economic-update-poverty-incidence-in-kenya-declined-significantly-but-unlikely-to-be-eradicated-by-2030. Accessed on 05 January 2020.
Haq, Z. U., Nazli, H., & Meilke, K. (2008). Implications of high food prices for poverty in Pakistan. Agricultural Economics, 39, 477-484.
Shrestha, M. B., & Chaudhary, S. K. (2012). The impact of food inflation on poverty in Nepal. NRB Economic Review, 24 (2), 1-14.
Romer, D. (1993). Openness and inflation: theory and evidence. The quarterly journal of economics, 108 (4), 869-903.
Shafique, M. (2016). Plunging Crude Oil Prices and Its Effect on Inflation in Pakistan. Available at SSRN 2890227.
Aye, G. C. (2016). Causality between Oil Price and South Africa’s Food Price: Time Varying Approach. Working paper 201486, Department of Economics, University of Pretoria. Available on: file:///C:/Users/u04270533/Downloads/essa_2931% 20 (2).
Kiptui, M. (2009, May). Oil price pass-through into inflation in Kenya. In African Econometric Society (AES) Conference Proceedings.
Watson, A. (2016). Trade openness and inflation: The role of real and nominal price rigidities. Journal of International Money and Finance, 64, 137-169.
Lin, F., Mei, D., Wang, H., & Yao, X. (2017). Romer was right on openness and inflation: Evidence from Sub-Saharan Africa. Journal of applied economics, 20 (1), 121-140.
Jedidia, K. B., Dammak, T. B., & Kamel, H. (2019). Trade-threshold Effect on Inflation in Tunisia: New Evidence Resulting from a Nonlinear Approach. International Economic Journal, 33 (1), 149-169.
Munir, S., Hasan, H., & Muhammad, M. (2015). The effect of trade openness on inflation: Panel data estimates from selected Asian economies (1976-2010). Southeast Asian Journal of Economics, 3 (2), 23-42.
Binici, M., Cheung, Y. W., & Lai, K. S. (2012). Trade openness, market competition, and inflation: Some sectoral evidence from OECD countries. International Journal of Finance & Economics, 17 (4), 321-336.
Bowdler, C., & Malik, A. (2017). Openness and inflation volatility: Panel data evidence. The North American Journal of Economics and Finance, 41, 57-69.
Sikdar, A., Kundu, N., & Khan, Z. S. (2013). Trade openness and inflation: A test of Romer hypothesis for Bangladesh.
Kwark, N. S., & Lim, H. (2020). Have the free trade agreements reduced inflation rates?. Economics Letters, 109054.
Sepehrivand, A., & Azizi, J. (2016). The effect of trade openness on inflation in D-8 member countries with an emphasis on Romer theory. Asian Journal of Economic Modelling, 4 (4), 162-167.
Durevall, D., & Sjö, B. (2012). The dynamics of inflation in Ethiopia and Kenya. African Development Bank Group.
Were, M and Kaminchia, S. 2011. “Is Inflation Targeting Feasible in Kenya?” A paper presented at the Global Development Finance Conference, Crowne Plaza Hotel, 8th to 10th November 2011.
Misati, R. N., Nyamongo, E. M., Njoroge, L. K., & Kaminchia, S. (2012). Feasibility of inflation targeting in an emerging market: evidence from Kenya. Journal of Financial Economic Policy.
Simpasa, A., Gurara, D., Shimeles, A., Vencatachellum, D., & Ncube, M. (2011). Inflation dynamics in selected East African countries: Ethiopia, Kenya, Tanzania and Uganda. AfDB Policy Brief.
Kiganda, E. O. (2014). Relationship between inflation and money supply in Kenya. Journal of Social Economics, 2 (2), 63-83.
Ditimi, A., Sunday, K., & Emma-Ebere, O. O. (2017). The upshot of money supply and inflation in Nigeria. Valahian Journal of Economic Studies, 8 (2), 75-90.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of levelrelationships. Journal of Applied Econometrics, 16 (3), 289-326
Lawal, A. I., Somoye, R. O., Babajide, A. A., & Nwanji, T. I. (2018). The effect of fiscal and monetary policies interaction on stock market performance: Evidence from Nigeria. Future Business Journal, 4 (1), 16-33.
Christian, P., & Barrett, C. B. (2018). Spurious Regressions and Panel IV Estimation: Revisiting the Causes of Conflict. The World Bank.
Monfared, S. S., & Akın, F. (2017). The Relationship Between Exchage Rates and Inflation: The Case of Iran. European Journal of Sustainable Development, 6 (4), 329-329.
Helmy, O., Fayed, M., & Hussien, K. (2018). Exchange rate pass-through to inflation in Egypt: a structural VAR approach. Review of Economics and Political Science.
Malhotra, A., & Krishna, S. (2015). The effect of Crude Oil Prices on Inflation and Interest Rates in India: Evidence from DCC-GARCH Model. Available at SSRN 2472558.
Aziza, Syzdykova., Cihan, T anrioven., Symbat, Nahipbekova., & Almaz, Kuralbayev (2019). The effects of changes in oil prices on the russian Economy. Revista ESPACIOS, 40 (14).
Indalmanie, S. P. (2011). The Relationship between Money Supply and the Rate of Inflation: A Causality Approach to the Study of the Jamaican Economy, 1961-2006. Available at SSRN 2586254.
Emmanuel, U., Udoh, B. E., Prince, A. I., Okoh, J., & Ndu, O. M. (2019). Money Supply and Inflation Rate in Nigeria: The Missing Link. Humanities, 7 (3), 156-166
Browse journals by subject