Testing the asymmetric effects of oil prices and trade openness on inflation in Somalia: Evidence from the NARDL framework

Abstract

Persistent inflation remains a critical challenge for import-dependent economies, where external shocks and structural vulnerabilities exacerbate price instability. However, existing studies often overlook the asymmetric effects of trade openness and oil price shocks on inflation in developing countries. Accordingly, this study investigates the nonlinear impacts of oil prices and trade openness on Somalia’s consumer prices from 1991 to 2021. The study employs a nonlinear autoregressive distributed lag (NARDL) model to capture short- and long-run dynamics. The analysis incorporates exchange rates, unemployment, and real GDP per capita to provide a comprehensive assessment of inflationary pressures. The bounds testing approach confirms the existence of a long-run cointegrating relationship among the variables. Asymmetric estimates reveal that both positive and negative oil price shocks increase inflation, with negative shocks having a stronger effect. Similarly, contractions in trade openness significantly raise inflation, while expansions have an insignificant impact. Exchange rate depreciation drives inflation in the long-run, whereas real income per capita only affects inflation in the short-run. Unemployment, consistent with the Phillips Curve, is negatively associated with inflationary pressures in the long-run. Policy recommendations include developing strategic fuel reserves, diversifying energy sources, improving trade infrastructure, strengthening exchange rate policies, and adopting adaptive inflation-targeting frameworks.