The effects of oil prices on the price indices in Taiwan: International or domestic oil prices matter?

This study employs the multivariate threshold model developed by Tsay (1998) to examine the effects of international and domestic oil prices on the price indices in Taiwan using monthly data from January 1999 to December 2011. The results show that changes in domestic oil prices do not Granger cause changes in the price indices when the oil price change exceeds the threshold level. However, international oil price shocks still affect the wholesale price index through the effects of announcement and expectation. Therefore, controlling domestic oil prices to prevent volatility in the price indices is ineffective. If we focus on the period when the left-wing party is in power, we also find that changes in international oil prices have more critical effects on the price indices than changes in domestic oil prices. However, the lead-lag relationship between changes in domestic oil prices and changes in the price indices vanishes except with respect to the transportation category where the consumer price index is affected by domestic oil prices. This result may be due to the governmentʹs extensive intervention in setting oil prices.