Dynamic linkages between import prices and consumer price: evidence from Sri Lanka

Abstract

Introduction :

Sri Lanka is a small economy and its consumer and intermediate goods accounts for more than 80% of total import expenditure where sugar, wheat, milk and milk products, fuel, fertilizer and red dhal share a larger proportion of imports. Hence domestic consumer prices and wholesale prices are influenced by world market prices. Further, import prices highly influence the inflation rate in the country which is also a politically sensitive issue.

There were a number of empirical studies focused on the dynamic relationship between consumer price and import price. Yunculer (2009) used the vector-autoregressive (VAR) model to investigate the relationship between the consumer price and external factors such as import price, oil price and exchange rate in Turkey. The results showed that pass-through of external shocks on wholesale price is greater than consumer price, though, import price and exchange rate affect consumer price while import price quickly pass-through than exchange rate. Hahn (2003); Takatosh, et.al (2005); Campa (2005); Hampton (2001); and Kiptui (2009) investigated causal relationship between import price and consumer price. Duma (2008) examined the pass-through of external shocks to inflation in Sri Lanka for the period of 2003 to 2007. The findings indicate that pass-through of external shocks is incomplete on domestic price inflation while internal factors mostly influence on inflation. However, only few studies have investigated the relationship between import prices and domestic prices. Dynamic linkages between import prices and consumer price in Sri Lanka are not adequately investigated.