Oil Shocks And Transportation Prices In An Energy Constrained Small Open Economy: Evidence From Bangladesh

We consider the impact of oil shocks on consumer transportation prices in an energy constrained small open economy using monthly data from Bangladesh between July 2003 and December 2020. Within a multivariate modelling approach, we find that higher availability of oil reduces inflationary pressure in transportation, and while we observe that prices of all other goods and services impart a positive pressure, the supply of oil inversely influences transportation prices. Estimating the variance of the inflation to find that both long and short run volatility of transportation prices are bounded and mean reverting. In addition, the impact of the volatility is symmetric, implying similar persistence of both positive and negative shocks. Transport inflation in Bangladesh, like other small oil energy constrained countries, is usually addressed through increasing the imports of oil. However, as the community of nations adopt renewable energy strategies in the face of environmental imperatives, Bangladesh will likely follow the trend. This presents an opportunity to address present oil dependency and transport inflation with policies that explicitly consider the long run renewable energy future.