Revisiting the relationship between Oil Price and Food Prices in the US: Evidence from Threshold Cointegration with Asymmetric Adjustment

Abstract

The main objective of this paper is to investigate the interaction between oil and food prices using threshold cointegration analysis. The study uses monthly data from January 1997 to September 2020. Empirical results reveal evidence of asymmetry in the adjustment process toward equilibrium. Uni-directional causality is detected between the variables, with oil prices causing changes in food prices. Additionally, oil prices are found to be cointegrated with food prices, suggesting the presence of an asymmetric adjustment mechanism. Specifically, the speed of adjustment to equilibrium varies depending on the sign of the last equilibrium error. The study recommends that policymakers should consider adopting measures that promote energy diversification, sustainable agricultural practices, and price stabilization mechanisms to mitigate the impact of oil price fluctuations on food prices and to enhance overall economic stability.

Keywords

• Oil price; Food Price; Nonlinear Cointegration, Asymmetric ECM