Abstract: Sharp increases in the prices of oil are generally unstable and this affects the economy of most countries results to the high domestic prices in developing countries especially in Rwanda. The aim of this research is to determine the effect of international oil prices on domestic prices in Rwanda using quarterly data covering the period of 2000Q1 to 2017: Q4, the study employs Vector Autoregressive model in order to test the interdependences between variables. Unit root test was conducted in order to test the stationarity of the data while Johansen co-integration approach was employed to investigate the long run relationship between consumer price index and variables mentioned above. Ordinary least square was adopted as estimation technique of the parameter to test their adequacy. Lastly Granger causality test was tested in order to emphasize the interdependence among variables. Eviews 7 software was used for data analysis. The results shows that all independent variables have positive impact on DOP, all coefficients of variables have positive sign, (5.265210) GDP, (4.012108) ER, (2.516107) CPI and (3.356115) M3. This shows that international oil prices contribute positively on the domestic prices in Rwanda from 2000-2017. R(-1)= -1.085016, this means that as far as time is concerned, the errors will be corrected at time t. All independents variable were positive correlated to the domestic price. R2 (0.056016) show the goodness of fit the model. Durbin- Watson Stat is greater than R2 which is (1.131954) >(0.958128). Basing on those results, the researcher found that R-squared is significant at 95%. This means that GDP, exchange rate, M3 AND CPI contributed to the domestic Oil prices in Rwanda. It can be seen from the above results that the increase of the international oil price has a negative effect domestic price. Meanwhile it showed that facing the high oil price; authorities are more inclined to adopt tight monetary policy to curb inflation. The government should be prepared to make tax exemptions especially on the imported crude oil in order to reduce the adverse effect it has on the general public. The government needs to further look at the ways to make the price cap work by putting further stringent measures on the players who do not adhere to the rules and regulations set and this will prevent the exploitation of the citizen. The Monetary Policy Committee of the Central Bank (BNR), has had several measures to stabilize the Rwanda franc exchange rate and increase interest rates in order to reduce inflation levels in the economy.
Title: MODELING THE EFFECT OF INTERNATIONAL OIL PRICES ON DOMESTIC PRICES IN RWANDA
Author: Josephine MBABAZI, Dr. Joseph K. MUNG’ATU, Dr. Patrick MULYUNYI (PhD)
International Journal of Management and Commerce Innovations
ISSN 2348-7585 (Online)
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