Energy Trade and Inflation: The Threshold Effect of Exchange Rates in Asta-Pacific Economies
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Universiti Malaysia Sarawak (UNIMAS)
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This study investigates the impact of energy trade, exchange rates, geopolitical events, economic uncertainty policies, money supply, and interest rates on the Consumer Price Index (CPI) in APEC countries. The persistent challenge of inflation is a macroeconomic determinant that need to be understood to make effective policy making. The exposure of APEC economies to inflationary pressures varies by the degree of exposure to inflationary pressures on the basis of their differing economic structures, trade dependencies and monetary policies. However, past studies have looked at these factors separately, rather than in combination. In this research, panel data analysis is employed to fill this gap by offering a comprehensive macroeconomic driver of inflation assessment with respect to the region. The study employs panel data from 20 APEC member economies from 1997 to 2021, gathered from credible databases including the World Bank, APEC Energy Database and Federal Reserve Economic Data (FRED). The individual and interactive effects of key macroeconomic variables on CPI are examined using Econometric techniques, which includes Pooled Ordinary Least Squares (OLS), Fixed Effects, Random Effects models and Threshold Regression Model. The study particularly looks at the impact of energy trade and exchange rates on the movement of inflation trends, and how geopolitical events and economic policy uncertainty can affect the process. Interaction terms are included so as to more completely analyse how energy trade impacts inflation under the influence of exchange rate fluctuations. The results show that energy trade and exchange rates are very significant in determining CPI, and geopolitical risks and economic policy uncertainty are important in driving inflationary pressures. The results also show that an increase in the money supply leads to iv an increase in inflation and that higher interest rates can either stem or intensify an inflationary trend depending on economic conditions. Based on the study, policy recommendations are offered to promote economic resilience and reduce inflation risks in APEC economies. Because of the central role of APEC in the world's economy, these insights provide important guidance to policy makers in the development of inflation control strategies that will promote long term economic stability.