Petroleum prices and household consumption expenditure in Ghana: The role of regulatory quality threshold

Abstract

Every household depends heavily on petroleum products; however, its prices are subject to considerable fluctuations and are known to have a major impact on household consumption and welfare. This study examined the role of institutions measured as regulatory quality in the petroleum prices and household consumption expenditure nexus using quarterly time series data from 2000Q1 to 2020Q4. Hansen sample splitting threshold method was used to test the threshold effect of regulatory quality. The study found a threshold effect between petroleum prices and household consumption expenditures nexus. The study went on to investigate the effect of petroleum prices on household consumption expenditure in both regimes. Increase in prices of Diesel and Liquefied Petroleum Gas lower household consumption expenditure in both regimes. However, the effect on household consumption expenditure is much greater when the regulatory quality score is high than when the regulatory quality score is low. Also, above the threshold level, Kerosene had no significant effect on household consumption spending, but below the threshold value, it had a significant impact. Similarly, petrol was found to have a significant impact on household consumption expenditures. It is recommended that the government reduces all levies and taxes on petroleum products during price hikes in order to reduce the burden on households. Furthermore, the government should ensure that petroleum products are accessible in the country at all times since these products account for a large portion of household consumption expenditures.