Hi, must  be use Impulse response function to decide.

Dear Drebee

I want the theoretical link before the empirical analysis. For the interpretation the theoretical link is more required otherwise the interpretation of the coefficient is meaningless. So suggest the possible theoretical link

regards

Hi Sayed

I am not an expert, so I am giving below some of my thoughts.

First we need to see if the economy is a Net Oil Importer or Net Oil Exporter.

Lets begin with Net Oil Importing Economy. As Crude Oil Prices increase, the first direct impact would be on the Oil Refining/Marketing Companies (OMCs). They would have to pay more (in foreign currency, say USD) for the same volume of imports. The OMCs may be exporting part of the refined oil, like petroleum products, for which they would get higher revenues (in USD). On the net, the OMCs may have to shell out more USD for the oil purchase. Therefore, the Trade Balance of the Country deteriorates, assuming exports have not changed much. With demand for USD increasing, the domestic currency depreciates. This could be the first-round effects.

Next, in order to maintain their margins, the OMCs would increase the prices of retail petroleum products. This would also depend on the extent of pass through allowed by the Government. (Scenario 1) If the retail prices are regulated, then the Subsidy payment of the Government to the OMCs would increase. Then the retail prices may not increase to the extent the price of crude increased. (Scenario 2) If the retail prices are not regulated, then the retail prices would increase almost to the same extent as the crude oil price increase. The OMCs may increase retail prices depending upon the price elasticity of retail oil demand.   

Be it Scenario 1 or 2, there would be some increase in the retail oil prices. For the household sector, this means higher expenditure on petrol/diesel, so there would be lower savings (assuming incomes are constant).

The expenditure on petrol/diesel/aviation fuel increases for transport companies (railways, roadways, airways, and waterways), they then pass-on the price rise to consumers and freight charges also go up. This would then lead to rise in current expenditure for the entire commercial sector in the economy. They would then pass on the price rise to their customers. As the exchange rate depreciates, the other importers in the economy would increase their product prices ("imported inflation")...All this lead to a generalised price rise in the economy.

In anticipation of a general inflation in the economy, the Central Bank may tighten monetary policy, i.e., increase policy interest rate. Subsequently, banks would also raise their deposit and lending rates. So interest rates in the economy would typically increase when crude price rises. With rising interest rates, growth in bank loans  may be expected to slow down.   

One positive off-shoot is if some of the non-resident citizens are working in the oil-producing/exporting countries, then there would be an increase in remittances (i.e., the money sent to their families back home). If the remittances is a big component in the economy's Balance of Payments (BOP), then this would arrest part of the depreciation of the domestic currency. The deterioration in the Current Account Balance of the economy may be lower (CAB = Trade Balance + Primary Income Balance + Secondary Income Balance).

Hope this helps. 

Thanks alot for detail Dear Kumar. Your answer clear my point. I appreciate your answer. Thanks once again.

Regards

There could be another channel through which crude price increase could impact interest rates when the retail prices are regulated (Scenario 1). As crude prices rises, government's revenue through import duties on crude oil imports rise, but since the retail prices are regulated, government's subsidy payout increase. On the net, government budget may go into a deficit. To fund the deficit, it has to borrow more. When Government's enter the financial market to borrow funds, it puts an upward pressure on interest rates.

Firstly oil exporter or importer country it will affect differently , if oil importer , inflation will increase overtime so interest rate too and quantity of loans will decrease . if exporter their export increase so their currency appreciate and so maybe they decrease interest rate.