Revisiting the Inflationary Effects of Oil Prices

Abstract

This paper uses a structural vector autoregression model to investigate the inflationary effects of oil prices. Rather than simply infer the oil price changes as oil supply shocks, we identify three different shocks in the crude oil market: the oil supply shock, the global aggregate demand shock, and the oil-market specific demand shock. We then use impulse response functions to compute the conditional oil price pass-through ratios. It is found that the largest oil price pass-through is caused by oil supply shocks. However, evidence from historical decompositions suggests that the oil price movements have been driven by shocks from strong global aggregate demand and oil demand while only minor contributions come from oil supply shocks. Disentangling demand and supply shocks in the crude oil market helps to uncover the fact that a recent decline in unconditional oil price pass-through may come from the low conditional passthrough caused by global demand shocks.

Keywords

Oil prices inflation structural VAR model

Get full access to this article

View all access options for this article.

References

Blanchard

Olivier J.

Gali

Jordi

(2007). “The macroeconomic effects of oil shocks: Why are the 2000s so different from the 1970s?”, NBER Working Paper Series, w13368.

Bohi

Douglas R.

(1989). Energy price shocks and macroeconomi. performance, Washington, D.C.: Resources for the Future.

Cologni

Alessandro

Manera

Matteo

(2008). “Oil prices, inflation and interest rates in a structural cointegrated var model for the G-7 countries”, Energy Economics, 30(3). 856-888.

Elliott

Graham

Rothenberg

Thomas J.

Stock

James H.

(1996). “Efficient tests for an autoregressive unit root”, Econometrica, 64(4). 813-36.

Ewing

Bradley T.

Thompson

Mark A.

(2007). “Dynamic cyclical comovements of oil prices with industrial production, consumer prices, unemployment, and stock prices”, Energy Policy, 35(11). 5535-5540.

Hamilton

James D. and AnaMaria Herrera

(2004). “Oil shocks and aggregate macroeconomic behavior: The role of monetary policy: Comment”, Journal of Money, Credit, and Banking, 36(2). 265-286.

Herrera

AnaMaria

Pesavento

Elena

(2007). “Oil price shocks, systematic monetary policy and the ‘great moderation”’, forthcoming, Macroeconomic Dynamics.

Hooker

Mark A.

(2002). “Are oil shocks inflationary? asymmetric and nonlinear specifications versus changes in regime”, Journal of Money, Credit, and Banking, 34(2). 540-561.

Kilian

Lutz

(2008a). “A comparison of the effects of exogenous oil supply shocks on output and inflation in the G7 countries”, Journal of the European Economic Association, 6(1). 78-121.

10.

Kilian

Lutz

(2008b). “Exogenous oil supply shocks: How big are they and how much do they matter for the U.S. economy?”, Review of Economics and Statistics, 90(2). 216-240.

11.

Kilian

Lutz

(2008c). “Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market”, American Economic Review, forthcoming.

12.

LeBlanc

Michael

Chinn

Menzie D.

(2004). “Do high oil prices presage inflation?”, Business Economics, 39(2). 38-48.

13.

McConnell

Margaret M.

Perez Quiros

Gabriel

(2000). “Output fluctuations in the united states: What has changed since the early 1980’s?”, American Economic Review, 90(5). 1464-1476.

14.

Rotemberg

Julio J.

(2007). “Comment on “the macroeconomic effects of oil price shocks: Why are the 2000s so different from the 1970s?””, in Gali

Jordi

Gertler

Mark J.

(eds.). International Dimensions of Monetary Policy, NBER.

15.

Shambaugh

Jay

(2008). “A new look at pass-through”, Journal of International Money and Finance, 27(4). 560-591.

16.

Van den Noord

Paul

Andre

Christophe

(2007). “Why has core inflation remained so muted in the face of the oil shock?”, Working Paper, Economics Department, OECD.