Abstract
This article examines the relationship between the oil market and inflation rates in 26 economies, covering both oil-exporting and oil-importing economies that collectively represent over 90% of the global GDP. Employing Bayesian global vector autoregressions that incorporate a large dataset of macroeconomic variables from 1979 to 2019, the study identifies the dynamic effects of supply- and demand-driven oil price shocks on global inflation. The evidence reveals that unexpected disturbances to Saudi Arabia’s oil supply have a persistent effect on real oil prices, leading to inflationary pressure in 18 of the 26 sampled economies, affecting both oil exporters and importers. Supply shocks from other oil-producing economies also induce inflation, albeit with less persistence among oil exporters. Furthermore, demand-driven oil price shocks exhibit a more prolonged inflationary effect on oil-importing economies compared to oil supply shocks. The article also identifies distinct transmission channels through which oil market shocks influence both energy and core consumer price indices in the Euro area and the USA. Notably, Saudi Arabia’s oil supply shock leads to higher nominal wages only in the Euro area
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