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Have rising oil prices become a greater threat to price stability?

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  • Martin Fukac

Abstract

The effect of oil prices on inflation has varied greatly in the last 50 years. Rising oil prices in the 1970s and early 1980s were associated with high and rising inflation. In the late 1980s and 1990s, however, the inflationary effect moderated. Although the experience of the energy crisis in the 1970s and its excessive and persistent inflation is unlikely to be repeated, mainly because of a better functioning monetary policy framework, Fukac finds recent evidence suggesting that oil prices again are playing a more significant role in inflation. He argues that temporarily accommodative monetary policy and structural changes in the U.S. economy—such as increased consumer spending on petroleum—possibly doubled the effect of oil price changes on inflation relative to the early 2000s.

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Bibliographic Info

Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2011)
Issue (Month): Q IV ()
Pages: 27-53

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Handle: RePEc:fip:fedker:y:2011:i:qiv:p:27-53:n:v.96no.4

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Keywords: Petroleum products - Prices ; Prices ; Inflation (Finance);

References

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  1. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, Elsevier, vol. 113(2), pages 363-398, April.
  2. Chen, Shiu-Sheng, 2009. "Oil price pass-through into inflation," Energy Economics, Elsevier, Elsevier, vol. 31(1), pages 126-133, January.
  3. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
  4. Jose De Gregorio. & Oscar Landerretche. & Christopher Neilson., 2007. "Another Pass-Through Bites the Dust? Oil Prices and Inflation," Working Papers Central Bank of Chile, Central Bank of Chile 417, Central Bank of Chile.
  5. Taeyoung Doh, 2010. "The efficacy of large-scale asset purchases at the zero lower bound," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q II, pages 5-34.
  6. Benk, Szilárd & Gillman, Max & Kejak, Michal, 2005. "Credit Shocks in the Financial Deregulatory Era: Not the Usual Suspects," Cardiff Economics Working Papers E2005/13, Cardiff University, Cardiff Business School, Economics Section.
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  8. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  9. Anton Nakov & Andrea Pescatori, 2007. "Oil and the Great Moderation," Banco de Espa�a Working Papers 0735, Banco de Espa�a.
  10. Todd E. Clark & Stephen J. Terry, 2010. "Time Variation in the Inflation Passthrough of Energy Prices," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 42(7), pages 1419-1433, October.
  11. Olivier J. Blanchard & Marianna Riggi, 2009. "Why are the 2000s so different from the 1970s? A structural interpretation of changes in the macroeconomic effects of oil prices," NBER Working Papers 15467, National Bureau of Economic Research, Inc.
  12. Goodfriend, Marvin, 2011. "Central banking in the credit turmoil: An assessment of Federal Reserve practice," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(1), pages 1-12, January.
  13. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," NBER Working Papers 17555, National Bureau of Economic Research, Inc.
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