The effect of oil price to inflation in vietnam

MINISTRY OF EDUCATION AND TRAININGUNIVERSITY OF ECONOMICS HO CHI MINH CITY Lâm Minh Minh THE EFFECT OF OIL PRICE TO INFLATION IN VIETNAM MASTER’S THESIS In Financial and Banking Ology co

MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

Lâm Minh Minh

THE EFFECT OF OIL PRICE TO INFLATION IN VIETNAM

MASTER’S THESIS

In Financial and Banking Ology code: 60.31.12

Supervisor

Dr Nguyễn Thu Hiền

Ho Chi Minh City 2010

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ACKNOWLEDGEMENT

Thisresearchwouldnothavebeenpossiblewithoutthesupportofmanypeopl e.Firstly,Iwishtoexpressmydeepsinceregratitudetomysupervisorwhoi s

a l s o myi n s t r u c t o r , D r NguyenT h u H i e n ( V i c e D e a n , S c h o o l

o f IndustrialManagement,UniversityofTechnology)forherinvaluablea dviceandhelps.Withouther,thisthesiscouldnothavebeencompleted.

Specialt h a n k s t o m y p r o f e s s o r s w h o a r e i n u n i v e r s i t y o f e conomicsHoChiMinhc i t y a n d D r C a o H a o T h i i n universityo f T e c h

n o l o g y HoChiMinh c i t y withoutw ho se kn ow le dg e anda ssista n ce thi

s st ud y wouldhavebeensuccessful.

Mythankswouldalsogotoallofmyclassmates,mycolleaguesforallofth eirfriendshipandencouragement.

Finally,Iwouldliketoexpressmydeepestgratitudeandhonourtomydea rparentsfornotonlythelovetheydevotetomebutalsoforthetimeItook fromthemwhichshouldhavebeenmydevotiontothemintheiragedtime Mygreatestthankswouldgotomyfamily,theirencouragementgiveapowerto finishthisresearch.

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ABSTRACT

Thisstudyanalysestheoilprice–

inflationrelationshipbymeansofanalysingtheimpactofoilpricesonconsum erpriceindex-CPIinVietnamusingmonthlydatafortheperiodofJan1995–

Nov2010.

Thisstudyreportsontheresearchresultsbytestingthemodelofrelationshipbetw eenthreemainfactorsasglobaloilprice,domesticoilpriceandVietnam’sC

P I t h r o u g h u s i n g t h r e e m a i n t e s t i n g s a s stationarityt e s t , c o i n t e g r

a t i o n t e s t a n d c a u s a l i t y t e s t T h a t t e s t i n g s i s c o l l e c t e d b a s e d o n t h e testingofmanypreviousresearchesthatpostonwebsiteofsciencedirect.

Thestudymayalsoprovidesomeequationtoquantifytheirrelationshipsucha s the impactofglobaloilpricetodomesticoilprice,theeffectofdomesticoilpric etoCPIandtheeffectofglobaloilpricetoCPIwiththepurposeofforecastin gwork.

Keyword:oilprice,inflation,CPI,theimpactofoilprice.

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TABLE OF CONTENT

ACKNOWLEDGEMENT I ABSTRACT II TABLEOFCONTENT III LISTOFFIGURE VI

CHAPTER 1: INTRODUCTION 1

1.1 -INTRODUCTION 1

1.2 -RESEARCHBACKGROUND 1

1.3 -RATIONALE OFTHERESEARCH 2

1.4 -RESEARCHOBJECTIVE 3

1.5 -SCOPE ANDMETHODOLOGYOFTHERESEARCH 3

1.5.1 -Scope of Research 3

1.5.2 -Research Method 4

1.6 -STRUCTURE OFRESEARCH 4

CHAPTER 2: LITERATURE REVIEW 5

2.1 -INTRODUCTION 5

2.2 -TRANSMISSION CHANNELSOFOILPRICES 5

2.2.1 -First-round effect 6

2.2.2 -Second-round effect 7

2.3 –PREVIOUSRESEARCHES 8

2.4 -CONCLUSION 10

CHAPTER 3: METHODOLOGY 11

3.1 -INTRODUCTION 11

3.2 -BUSINESSRESEARCH 11

3.3 -RESEARCHDESIGN 12

Page4

3.3.1 -Research Hypotheses: 13

3.3.2 -Draft of Research Model: 15

3.4 -RESEARCHMODEL 15

3.5 –OVERVIEWDATA 21

3.5.1 –HISTORY OFWORLDOILPRICE 21

3.5.2 –INFLATIONOFVIETNAM 25

3.5.3–Oil price of Vietnam: 29

3.6–CONCLUSION 31

4.1 -INTRODUCTION 32

4.2 -DATADESCRIPTION 32

4.2.1 Global oil price 33

4.2.2 Domestic oil price in Vietnam 33

4.2.3 Consumer price index 34

4.2.4 Exchange rate in Vietnam 35

4.3 -TESTINGCORRELATIONBETWEENVARIABLES 36

4.4 -TESTINGSTATIONARITY 39

4.5 -TESTINGCOINTEGRATION 42

4.5.1 -Relationship betweenglobaloilprice and domestic oil price 42

4.5.2 -Relationship between domestic oil price and CPI 44

4.5.3 -Relationship betweenglobaloilpriceandCPIofVietnam 45

4.6 -TESTINGCAUSALITY 46

4.6.1 -Causality test for WO–DO 47

4.6.2 -CausalitytestforDO–CPI 48

4.6.3 -Causality test for WO-CPI 49

4.6.4 -Causality test for WOEX-CPI 50

4.7 -FINDINGSANDCONCLUSIONS 51

CHAPTER 5:CONCLUSIONS AND IMPLICATIONS 53

5.1 -I NTRODUCTION 53

5.2 -C ONCLUSIONSOFTHERESEARCH 53

5.2.1 -Summaryof hypotheses and results 53

5.2.2 -Conclusion 54

5.3 -I MPLICATIONSOFTHERESEARCH 55

5.4 –L IMITATIONS 56

LISTOFREFERENCE 58

List of Figure

Figure1.1–Outlineofchapter1 1

Figure1.2–Structureofthe Research 4

Figure2.1–Outlineofchapter2 5

Figure3.1–Outline ofchapter3 11

Figure3.2–ResearchDesign 13

Figure3.3.1–TransmissionChannelsofOilPrice 14

Figure3.3.2–Original ResearchModel 15

Figure3.4–ResearchModel 17

Figure3.5–CrudeOilPrices1869-2009 22

Figure3.6–CrudeOil Prices1947–2009 23

Figure3.7–CPIoftermendandaverage1992–2010 27

Figure3.8–GasolineR92Retail’sPriceinVietnam 29

Figure4.1–Outline ofchapter4 32

Figure5.1–Outline ofchapter5 53

Figure5.2.1-Summary of hypotheses and results 54

ListofTable

Table4–DescriptiveStatistics 32

Table4.1–CorrelationsMatrix 38

Table4.2–Testingthestationarityofvariables 39

Table4.3–Testingvariableoffirstdifference 39

Table4.4–Testingvariableofseconddifference 40

Table4.5–ModelDescription(CPI) 40

Table4.6a–ModelSummary 42

Table4.6b–Coefficients 42

Table4.7a–ModelSummary 43

Table4.7b–Coefficients 43

Table4.8a–ModelSummary 44

Table4.8b–Coefficients 44

Table4.9a–ModelSummary 45

Table4.9b–Coefficients 45

Table4.9c–ModelSummary 45

Table4.9d–Coefficients 46

Table4.10–CausalitytestforDOandWO 47

Table4.11–CausalitytestforDOandCPI 48

Table4.12–CausalitytestforWOandCPI 49

Table4.13–CausalitytestforCPIandWOEX 50

Table5.1–Summaryofhypothesesandresults 53

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Chapter 1:INTRODUCTION1.1 -Introduction

Thischapterportraygeneralintroductionforthecurrentresearchwithwhichresearchproblem,researchobjectivesandresearchquestionsareprovidedastherationaleforthisresearch.Anintroductiont o t h e methodologytobeusedandthescopeoftheresearchisalsoaddressedinthischapter.Attheendofthechapter,structureoftheresearchis provided.The Outlineof thischapterisshowninfigure1.1

Figure 1.1–Outline of chapter1

yp o l i c y a n d i t s m a c r o t a r g e t s h a v e beenadjusted fromtime totime

Articlesrepeatedinmanynewspapersandmagazinesconcludethatincreasesinoilpricessuchasthoseseeninrecentyearspassedt h r o u g h t h e country’sinflation.Wheneveroilpriceincreases,otherpricesalsoriselater.Itraisedlivingexpensehigherthanbefore,whilesalaryandwageshavebeenkeptstablestill.Asaresult,the

acceptance

1.3 -Rationale of the Research

Itiseasytorecognizethatrisingoilpricestendtoaffect theoverall consumerpriceindex(CPI)directly andindirectly

- Directly,t h r o u g h raisingi t s e n e r g y c o s t component,whichincludest h e priceso f energy-

relateditems,suchasmotorfuels,gas,andelectricity.Gasolineandfueloilarederiveddirectlyfromc r u d e oil,sot h e i r pricesfollowoilpricesveryclosely.Anincreaseinthepriceofoilmayalsoaffectenergycoststhroughthepricesofotheritemsthatareclosesubstitutes,t h u s l e a d i

n g t o a n

increasefromthepricesofoil-relatedenergytonaturalgasprice.Theextenttowhichrisingoilpricestranslateintohigheroverallinflationthroughhigherenergycostsdependsontheirpersistence.Ifoilpricecontinuetorise,itmayleadtosustainedincreasesintheoverallpricelevel,thatis, to an increase in theoverall inflation rate

- Indirectly,througheffectivethecoreportionoftheCPI,becausee n e r g y pricesrepresentaconsiderableportionoftheproductioncostformanyoftheitems

init,suchast r a n s p o r t a t i o n services.Inaddition,ifworkershavet o p a y higherenergyp r

i c e s t h e m s e l v e s , theymaybargainforcompensatingwageincreases,whichalsoincreasesth e productioncostsofitemsi n t h e c o r e CPI.T h e extentt o whichr i s i n g o i l p r i c e s translateintohighercorei n f l a t i o n throughhigherproductioncostsdepends,amongotherthings,onhowmuchtheybreakintotheoverallinflationexpectationsofthosewhosetpricesandwages.Infact,ifrisingoilpricesleadtohigherinflationexpectationsoverthelongerterm,risingenergyandwagecostsaremorelikelytobepassed throughintermsofrisingconsumerprices.Inthiscase,risingoilpricesmayleadtosustainedincreasesinthecoreportionoftheCPI,thatis,toanincreaseincoreinflation

However,thematterishowstrongtherelationshipbetweenchangesi n crudeoilpricesandininflationis.Intheory,thecausalrelationshipisclear.Asharpjumpinthepriceofcrudeoilcausesaninflationaryshockandtheimpactwillbegreatestwhena countryisa large-

scaleimporterofoilandhasmanyindustriest h a t useoila s a n essential input in theproduction process

Fromarticles onnewspaperormagazinesuchasVNexpress,SaigontimeandTuoiT r e newspaperetc…itisgenerally concludedthatoil priceaffectstoinflation–CPI

1.4 -Research Objective

Thisresearch,therefore,putsaneffortontocheckingt h e relationshipbetweeno i l pricesandinflationtoanswerthefollowing question

Q1.Do oil prices affect to inflationrate?

Q2.How do oil prices affect to inflation rate?

Thisresearchmeasurestherelationshipo f o i l p r i c e fluctuationandinflationrate,specificallyconsumerprice index (CPI)

As noted above, the objective of this research is totest the hypothesisthat

- Oilprices affect to CPI or not

- OilpricesaffecttoCPIbymeasuringtherelationshipbetweenglobaloilprice,localoil price and CPIinlongterm

Itprovidespecificpictureabouttheissuetomacroeconomista n d policymakeri n dealing withmanaginginflationduring the current financecrisis

1.5 -Scopeand MethodologyoftheResearch

1.5.1 -ScopeofResearch

Thisresearchisonlyusingofficialdatathatannouncedonpublicinformationchannels.Withtheinflation,achiefmeasureofpriceinflationistheinflationrate,theannuallypercentagechangeinageneralpriceindex.Theresearchisconcentratedonfluctuationoftheinflationratethroughthecoreinflation–

consumerpriceindex(CPI)o f everymonthinVietnam.Whiletheoilpricebaseonthecrudeoilpriceof

internationaltrade.ThereasonofthisusingisthatVietnamisanoilimporter.AlthoughVietnamisanexporterofcrudeoil,thefuelandgasolineinconsumingdomestictradingisimportedfromSingaporeandothers.Therefore,oilpriceiscontrolled by thecrudeoil priceofinternationaltrade.

Besidem a i n factorswerem e a s u r e d t h a t oilpriceaffecttoinflation,theresearchconsidereffectofrelatingcomponentsofCPIorotherfactorsonoilpricessuchasinterestratepolicyand government’s monetary policy for controlling inflation

1.5.2 -Research Method

Firstly,relevantpaperswerereviewedtostudytheirmodelofresearchandfindoutthemodelformyresearch.Afterthat,Icollectdemandingdataandselectthemodellingforprocessingdata.W i t h quantitativeanalysis,I c h o o s e monthlyd a t a f r o m 1 9 9 5 t o 2010,totaln=191months.ByusingMultipleLinearRegressionanalysis(MLR)ofSPSSsoftwarev e r s i o

n 1 5 a n d E v i e w softwarev e r s i o n 6 0 , t h e r e s u l t willi n d i c a t e specificrelationshipbetweenoilpricea n d CPI.Chapter3 willdiscusst h e methodology

forthisstudyinmore details

1.6-Structure of Research

The structureof this research is shown in figure 1.2

Figure 1.2–Structure of the Research

Chapter3 Methodologyand OverviewData

Chapter4 DataanalysisandFindings

Chapter5 Conclusion and Implication

Chapter 2: LITERATURE REVIEW2.1 -Introduction

Thepreviouschapterintroducesanoverviewoftheresearchbackground,therationaleofthestudy,theresearchobjective,andtheresearchquestion.Thischapterissearchedandreviewedrelevanttheoriesintheliterature.Theaimofthisreviewistodeterminethe relationshipbetween oilpriceandinflationinVietnam

Figure 2.1–Outline of chapter2

Internationaloilpricesarehighlyrelevanttounderstandfirmpricesettingbehaviour,giventhatt hes har e of householdspendingdevotedtor e f i n e d o il productsis substantialandthatoilandrefinedoilproductsareaninputintheproductionofgoodsandservices.Oilpriceshocksaffecttheeconomythroughdifferentchannels:thesupplyside,t h e demandsideandthetermsoft

r a d e

(MartinSchneider,2007).Thetransmissionmechanismlinkingglobaloilpricestoconsumerpriceinflationisquitecomplexa n d t h e strengtha n d timingo f t h e differentc h a n n e l sdependonnumerous

factors,soitisconceptuallyusefulbutbreakdownthelinkageintofirst-round(directandindirect) and second-roundeffects.(MarkA Hooker,2002)

Itmeansthatthefirst-roundeffectistheeffectofsupplyside(direct)andtheeffectofdemandside(indirect)andsecond-roundeffectisthetermoftrade)

(T.Abeysinghe,2001).Inotherword,intermsofpriceeffects,theimpactisoftenbrokendownintodirectandindirect-first-round and second-roundeffects

2.2.1 -First-roundeffect

Thefirst-roundeffectofhigheroilpricesonconsumerpriceindexcanbe brokendown intoadirect and an indirect effect

- Supplysuffersasproductioncostriseinthewakeofanoil price shock.Givensubstitutionbetweenproductionfactors,relativepricechanges resultinareallocationoft h emeansofproduction.This,inturn,cushionst h e negativeeffects.The longtermeffectsonproductioncapacityarethuslesspronouncedthantheshorttermeffects,whicharedominatedbyfrictionarisingasaresultofresourcereallocationandbyuncertaintiesaboutthesubsequentdevelopmentofoil prices However,these intersectoral

(trainingexpenses,irreversibleinvestment,etc.).Theactualimpactoninvestmentessentiallydependsontheexpectationsaboutthestabilityofoilpricechanges,whichtendtovaryovertime.Inshort,thedirecteffectsreflectstheimpactofchangesi n o i l p r i c e

s o n consumerl i q u i d fueloroilenergyp r i c e s , whicha r e consumedbyhouseholds

- Onthedemandside,oilpriceshocksdriveupthegenerallevelofprices,whichtranslateintolowerrealdisposableincomesandthusreducesdemand.Indirecteffectsrefertotheimpactofchangesonconsumerpricesthatoccurasoilpricesimpacto n p r o d u c e r c o s t

a n d prices.T h e indirecte f f e c t o n consumerp r i c e s i s considerablyhardertoestimate,soitisusefultoconsiderdifferentapproaches.Amongthedifferentnon-

energygoodsandservicesincludedintheCPIbasket,oilandoilrefinedproductsareparticularlyrelevantintheproductionprocessof

someservices,suchastransportservices.Theindirecteffectreflectsthechangeinthecostofproducinggoodsandserviceswhichusepetroleumproductsasaninputanditspassthroughtofinalprices.Industrieswhichemployoilintensivetechnologiesareparticularlyaffectedbychangesinthepriceofoil,sincetheirmarginalcostvarytoa largerextent.Thistransmissionchannelhasa considerablylowerspeedofpassthroughthanthedirectimpactandastrengththatvariesaccordingtofactorssuchasmarketcompetition,cyclicaldevelopments or the expected transitoryor permanent nature oftheshock.

2.2.2 -Second-round effect

Consumerpricesmayalsobeaffectedbyso-calledsecond-

roundeffects.Theserefertothefactthatfirst-roundpricechangesmaytriggerarevisionofinflationexpectationsthatleadtoaresettingoffinalprices, eitherdirectlyorindirectly,throughthewage-

bargainingprocess.Revisionsininflationexpectationsmaye n t a i l pricechanges,totheextentthatfirmstrytomaintainprofitsinrealterms.Ifnominalwageareresetasaresultofanoilpriceshock,unitlabourcostsoffirmsv a r y a n d mayb e p a s s t h r o u g h finalprice.Atanyrate,inflationexpectationsofhouseholdsa n d firmsdependonhowe x

p e c t a t i o n s

ofmedium-terminflationareanchoredbythemonetarypolicyframework,sothatinflationexpectationscanremainstablefollowinganoilpriceshockifthecentralbankiscredibleenough.(LuisJ,Allvarez,SamuelHurtado,IsabelSánchezandCarlosThomas,2009)

Intheothersword,apartfromtheirdirecteffectsonthegeneralpricelevel,oilpricealsohavesecondroundeffects,asrigidnominalwagesandpriceandwageindexationaddtoinflation.Higherwagepressuresandweakerdemanddampenemployment.Inadditiontothat,adeteriorationofconfidenceandstockmarketreactionscanamplifytheimpactofashock.Furthermore,economicsarehitbychangesintheinternationalenvironmentbroughtaboutbyo i l

p r i c e shocks.Climbingimportpricest r i g g e r a deteriorationo f t h e t e r m o f t

r a d e a n d thusprecipitatewelfarelosses.Inbrief,secondroundeffectsariseshouldoilprice

changesimpactonwagesspecificallyandinflationexpectationsandpricesettingmoregenerally.Oilpricesmayalsoimpactonrealsideofeconomyviapurchasingpowerandtermsoftradeeffects, etc.

asymmetric.AnincreaseinthepriceofoilfeedsthroughtoGDPgrowthtoamuchlargerextentthanadecline,aphenomenonthatcanbeattributedtoadjustmentcostsassociatedwithsectoralreallocations,theimplicationsofuncertaintiesforspendingonconsumerdurablesandinvestment,andnominalwagerigidities.Furthermore,theelementofsurpriseinoilpricehikesseemstoplayaconsiderablerole.Thus,whenariseinthepriceofoiloccursaftera prolongedperiodofoilpricestability,i t hasa larger impact thanaprice hike whichimmediatelyfollowspreviouscuts

ImadA.Moosa(1993)addressesanissuethathasbeenthesubjectofdebateinthemediaandinacademiccircles.ThepaperconcernstheeffectofoilpricesinitiatedbyOPEConeconomicactivityinOECDcountries.Resultsofcointegrationtestindicatedthatthereisnolong-

runrelationshipbetweenoilpricesandmacroeconomicvariablesinOECDcountries.However,causalitytestingindicatestheexistenceofunidirectionalcausalityfromoil

pricestodomesticpricesandoutput

WhileApinyaWanaseto f S c h o o l o f Economicso f SukhothaiThammatiratOpenUniversity(Thailand)aimedt o examinet h e pass-

throughe f f e c t s ofkeymacroeconomicvariablesontheexchangerateinThailandbyusingaVector

Autoregressive(VAR)analysis.Themacroeconomicvariablesusedinthatstudyareexchangerate,G D P , C P I , moneysupply,andoilpricefromtheperiodof1993Q1t h r o u g h 2008Q4.TheresultfromtheVARanalysissuggestthatfirst,allkeymacroeconomicvariable,includingGDP,CPI,moneysupply,andoilpricehaveaffectedexchangeratevolatilityfromimpulseresponseanalysis.Second,forthevariancedecompositionanalysis,CPIshockhasthemostinfluentialeffectonexchangeratevolatility.Finally,thecausalitytestssuggestthatGDPabsorbsallofthee f f ec t s fromexchangerate,moneysupply,CPI,andoilprice.Atthesametime,GDPaffectsmoneysupplyaswell.Insum,t h e resultimplyt h a t c h a n g e s i n keymacroeconomicvariable are likelyaccompaniedby exchange rate volatility.

With“Thepassthroughofoilpricesintoeuroareaconsumerliquidfuelpricesinanenvironmentofhighandvolatileoilprice”byAidanMeylerconsidersthepasst h r o u g h ofoilpricesintoconsumerliquid(i.e.petrol,dieselandheating)fuelpricesinsuchanenvironment.Themaincontributionofthispaperisa comprehensivecombinationofmanyfeaturest h a t havebeenconsideredbeforebutrarelyj o i n t l y Thesefeaturesinclude:

(1)theanalysisoftheeuroareaasanaggregateanda largenumberofcountries(theinitial 12memberstates);(2)theconsiderationofdifferenttimeperiods;

(3)themodellingofthedatainrawlevelsratherthaninloglevels.Thisturnsoutt o havei m p

o r t a n t i m p l i c a t i o n s forfindings;

( 4 ) t h e u s e o f h i g h frequency(weekly)data,which,asresultswillsuggest,arethelowestfrequencyoneshouldconsider;

(5)theinvestigationo f t h e d i f f e r e n t stagesoft h e productionc h a i n fromcrudeoilpricest o retaildistribution-

veorbelowtheirequilibriumlevel.Themainfindingsa r e a s f o l l o w s : First,a s distributiona

n d retailingcostsa n d marginsh a v e b e e n broadlystableo n

average,t h e m o d e l l i n g oft h e relationshipbetweenconsumerpricesexcludingt a x e s andupstreampricesinrawlevelsratherthaninlogarithmshasimportantimplicationsforthestabilityofestimatesofpassthroughwhenoilpricel e v e l s risesignificantly.Second,consideringspotpricesforrefinedpricesimprovessignificantlythefitofthee s t i m a t e d models

economicallymeaningfulresultsconcerningtheextentofpassthrough.Third,oilpricepassthroughoccursquickly,with90%occurringwithinthreetofiveweeks.Fourth,usingarelativelybroadspecificationallowingforasymmetryinthepassthroughfromupstreamtodownstreamprices,thereislittleevidenceofstatisticallysignificantasymmetries.Furthermore,e v e n

w h e r e asymmetryi s foundt o b e statisticallysignificant,itisgenerallynoteconomicallysignificant.Lastly,theseresultsgenerallyholdacrossmosteuroareacountries withfewexceptions

And“RecentoilpriceshockandTunisianeconomy”bySoniaZouari-Ghorbelistostudytheoilprices–

macroeconomyrelationshipbytheanalysisoftheroleofsubsidypolicy.T h e vectorautoregression(VAR)methodwasemployedt o a n a l y s e thedataove r theperiod1993Q1-

2007Q3.Theresultsofthemodelusingbothlinearandnon-linearspecificationsindicatethatthereisnodirectimpactofoilpriceshockontheeconomicactivity.Theshockofoilpricesaffectseconomicactivityindirectly.Themostsignificantchannelbywhichtheeffectsoftheshockaretransmittedi s t h e government’s spending

2.4 -Conclusion

Thischapterprovidestheoreticalframeworkfortheresearch.However,withthereasonregardingtherelationshipofoilpriceandinflation aspectasdiscussedabove suchasfirstroundeffectandsecondroundeffectordirectandindirect,a researchmodel will be studiedmoredetailsinchapter 3

Chapter 3: METHODOLOGY3.1 -Introduction

Thepreviousc h a p t e r providest h e o r e t i c a l frameworkfortheresearch.Thischapterprovidesanoverviewofbusinessresearch,introducesresearchmethodology,thestatistictechniqueemployedtoan a l y se da ta andt est in gt he researchhypothesesandresearch model aswell.The chapter outline is shown in figure 3.1

t h e followingthreet y p e s ofmethodswasoftena p p l i e d :

- Exploratorystudy:Thisisthebasiclevelofresearch.Thistypeisusedwhentherei s aneedto

clarifytheunderstandingofproblem,orwhenitisuncertainaboutwhichtheoryisrelevantorcanbeappliedto explain the nature of phenomena

- Descriptivestudy:Theobjectiveofdescriptivestudyi s “ t o p o r t r a y a n a c c u r a t e p

rofileofpersons,eventsorsituations”(Robson,1993).Thismaybeanextensionofanexploratoryresearch.Itisnecessarytohaveaclearpictureofthecharacteristicsofwhichthe datawillbecollectedpriortothecollection of data

- Causalstudy:In this type ofresearch,theemphasisisonstudyingaspecificsituationoraprobleminordertoexplain the relationship betweenvariables.

Basedonthecharacteristicsofdataneededandresearchpurpose,researcherscanchooseeitherqualitativeorquantitativeapproachoracombinationofthesetwotypes.Inaddition,datacanbeacquiredviaavarietyofstrategiessuchasexperiment,survey,case study,grounded theoryoraction research

Quantitativeresearchisaimedt o determinet h e relationshipb e t w e e n o n e t h i n g ( a n independentvariable)andanother(adependentoroutcomevariable)inapopulation.Quantitativeresearchdesignsareeitherdescriptive(subjectsusuallymeasuredonce)orexperimental(subjectsmeasuredbeforeandafteratreatment).Adescriptivestudyestablishes

onlyassociationsbetween variables An experimentestablishescausality

Inallstudies,subjectcharacteristicscanaffecttherelationshipyouareinvestigating.Limittheireffecteitherbyusingalessheterogeneoussampleofsubjectsorpreferablyb y measuringthecharacteristicsandincludingthemintheanalysis.Inanexperiment,trytomeasurevariablesthatmightexplainthemechanismofthetreatment.Inanunblendedexperiment,suchvariablesc a n helpdefinet h e magnitudeofanyplaceboeffect (WillGHopkins,2000)

3.3 -Research Design

Thefirststepinbusinessresearchistodeterminewhatobjectivetheresearcherwantstoachieve.Researchdesignthenenablestheresearchertoselectappropriatemethodsin order to meet theresearch objectives in the most efficient way

Fundamental TheoryObjective

Literature review Method

Data SelectionData sources

Data CollectionData collection

Data AnalysisClean Data

Data Analysis

ResultFindings and Conclusion

Tomeasuretheeffectofoilpricetoinflation,thisstudyemploysadescriptivemethodbecauseofdescribingt h e relationshipsamongvariable.Datafort h i s researchwascollectedfromofficialresource.Andthenquantitativeanalysist h r o u g h regressionwiththesamplesizen=191andsignificantornotsignificantatthe5%levelisappliedi n ordertotestingandmeasuringtherelationshipof oil priceandinflation

The research process of this studyisshowninfigure3.2

Figure 3.2–Research Design

3.3.1 -Research Hypotheses:

Baseontheaboveliteraturereviewofchaptertwo,somepreviousstudyindicatedthatt h

e shockofglobaloilpriceaffecttoinflationspecificallyconsumerpriceindex

(CPI)throughseveralchannel.ItsummarizeintheDiagramas below