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Another Pass-Through Bites the Dust? Oil Prices and Inflation

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Author Info
Jose De Gregorio, Oscar Landerretche, Christopher Neilson

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Abstract

This paper presents evidence of an important decline during recent decades in the pass-through from the price of oil to the general price level. We find that this decline is a generalized fact for a large set of countries. After documenting correlations between the consumer price index and oil prices, we use two estimation strategies in an attempt to properly identify the effect of oil shocks on inflation. First, we estimate the traditional Phillips curve augmented to include oil and test for structural breaks in 34 countries. This methodology shows a fall in the average estimated passthrough for industrial economies and, to a lesser degree, for emerging economies. Second, we estimate rolling vector autoregressions for a subsample of countries for which we have sufficient data. We derive impulse response functions of inflation to oil shocks and interpret the integrals as estimates of pass-through. We find that the effect of oil shocks on inflation has weakened for most of the 12 countries in the sample. Among the factors that might help to explain this decline, we argue that the most important are a reduction in the oil intensity of economies around the world, a reduction in the exchange rate pass-through, a more favorable inflation environment, and the fact that the current oil price shock is largely the result of strong world demand. These factors help to explain not only why the current shock has had limited inflationary effects, but also why it has had limited consequences for output.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 417.

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Date of creation: May 2007
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Handle: RePEc:chb:bcchwp:417

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Gali, Jordi & Gertler, Mark & David Lopez-Salido, J., 2005. "Robustness of the estimates of the hybrid New Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1107-1118, September. [Downloadable!] (restricted)
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  2. Ariel Burstein, Martin Eichenbaum, and Sergio Rebelo, 2005. "Large Devaluations and the Real Exchange Rate," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 742-784, August.
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  3. Ilan Goldfajn & Sergio R.C. Werlang, 2000. "The pass-through from depreciation to inflation : a panel study," Textos para discussão 423, Department of Economics PUC-Rio (Brazil). [Downloadable!]
  4. James D. Hamilton & Ana Maria Herrera, 2001. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy," University of California at San Diego, Economics Working Paper Series 2001-10, Department of Economics, UC San Diego. [Downloadable!]
  5. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June. [Downloadable!] (restricted)
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  7. Kenneth S. Rogoff, 2003. "Globalization and global disinflation," Proceedings, Federal Reserve Bank of Kansas City, pages 77-112. [Downloadable!]
  8. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Jeremy Rudd & Karl Whelan, 2005. "Modelling inflation dynamics: a critical review of recent research," Finance and Economics Discussion Series 2005-66, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  10. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies. [Downloadable!]
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  11. Bernanke, Ben S. & Gertler, Mark & Waston, Mark, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Working Papers 97-25, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  12. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  13. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series 5, Central Bank of Brazil, Research Department. [Downloadable!]
  14. Kenneth Rogoff, 2003. "Globalization and global disinflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 45-78. [Downloadable!]
  15. Wong, Ka-fu, 2000. "Variability in the Effects of Monetary Policy on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(2), pages 179-98, May.
  16. Bruce E. Hansen, 2001. "The New Econometrics of Structural Change: Dating Breaks in U.S. Labour Productivity," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 117-128, Fall. [Downloadable!] (restricted)
  17. Hooker, Mark A, 2002. "Are Oil Shocks Inflationary? Asymmetric and Nonlinear Specifications versus Changes in Regime," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 540-61, May.
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  19. Joseph E. Gagnon & Jane Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers 704, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  20. Lynda Khalaf & Maral Kichian, 2003. "Testing the Stability of the Canadian Phillips Curve Using Exact Methods," Working Papers 03-7, Bank of Canada. [Downloadable!]
  21. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22. [Downloadable!]
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  22. Michael C. Davis & James D. Hamilton, 2003. "Why Are Prices Sticky? The Dynamics of Wholesale Gasoline Prices," NBER Working Papers 9741, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  23. Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 614-639, June. [Downloadable!] (restricted)
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  24. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
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  25. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers 5994, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Olivier J. Blanchard & Jordi Gali, 2007. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s?," NBER Working Papers 13368, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Olivier J. Blanchard & Jordi Galí, 2007. "The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so different from the 1970s?," Economics Working Papers 1045, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  3. Alberto Musso & Livio Stracca & Dick van Dijk, 2007. "Instability and nonlinearity in the Euro area Phillips curve," Working Paper Series 811, European Central Bank. [Downloadable!]
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