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Do High Oil Prices Presage Inflation? The Evidence from G-5 Countries

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  • LeBlanc, Michael
  • Chinn, Menzie David

Abstract

We estimate the effects of oil price changes on inflation for the United States, United Kingdom, France, Germany, and Japan using an augmented Phillips curve framework. We supplement the traditional Phillips curve approach taking into account the growing body of evidence suggesting that oil prices may have asymmetric and nonlinear effects on output and that structural instabilities may exist in those relationships. Our statistical estimates suggest current oil price increases are likely to have only a modest effect on inflation in the U.S, Japan, and Europe. Oil price increases of as much as 10 percentage points will lead to direct inflationary increases of about 0.1-0.8 percentage points in the U.S. and the E.U. Inflation in Europe, traditionally thought to be more sensitive to oil prices than in the U.S., is unlikely to show any significant difference in sensitivity from that in the United States and in fact may be less in some countries.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt4wt4m7hg.

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Date of creation: 19 Feb 2004
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Handle: RePEc:cdl:ucscec:qt4wt4m7hg

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Keywords: inflation; Phillips curve; oil prices; exchange rates;

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References

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  1. Kiseok Lee & Shawn Ni & Ronald A. Ratti, 1995. "Oil Shocks and the Macroeconomy: The Role of Price Variability," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 39-56.
  2. Hoover, Kevin D. & Perez, Stephen J., 1994. "Post hoc ergo propter once more an evaluation of 'does monetary policy matter?' in the spirit of James Tobin," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 47-74, August.
  3. Peter Isard & Ben Hunt & Douglas Laxton, 2001. "The Macroeconomic Effects of Higher Oil Prices," IMF Working Papers 01/14, International Monetary Fund.
  4. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October.
  5. Hooker, Mark A., 1996. "This is what happened to the oil price-macroeconomy relationship: Reply," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 221-222, October.
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Cited by:
  1. Degiannakis, Stavros & Filis, George & Floros, Christos, 2013. "Oil and stock returns: Evidence from European industrial sector indices in a time-varying environment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 175-191.
  2. Ewing, Bradley T. & Thompson, Mark A., 2007. "Dynamic cyclical comovements of oil prices with industrial production, consumer prices, unemployment, and stock prices," Energy Policy, Elsevier, vol. 35(11), pages 5535-5540, November.
  3. Liew, Freddy, 2012. "Forecasting inflation in Asian economies," MPRA Paper 36781, University Library of Munich, Germany.
  4. Akoum, Ibrahim & Graham, Michael & Kivihaho, Jarno & Nikkinen, Jussi & Omran, Mohammed, 2012. "Co-movement of oil and stock prices in the GCC region: A wavelet analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(4), pages 385-394.
  5. Guillaume L`oeillet & Julien Licheron, 2009. "The role of oil prices in monetary policy rules: evidence from 4 major central banks," Economics Bulletin, AccessEcon, vol. 29(3), pages 2361-2371.
  6. Tweneboah, George & Adam, Anokye M., 2008. "Implications of Oil Price Shocks for Monetary Policy in Ghana: A Vector Error Correction Model," MPRA Paper 11968, University Library of Munich, Germany.
  7. Sukati, Mphumuzi, 2013. "Cointegration Analysis of Oil Prices and Consumer Price Index in South Africa using STATA Software," MPRA Paper 49797, University Library of Munich, Germany.

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