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Revisiting the Inflationary Effects of Oil Prices

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  • Shiu-Sheng Chen

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 pass-through caused by global demand shocks.

Suggested Citation

  • Shiu-Sheng Chen, 2009. "Revisiting the Inflationary Effects of Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 141-154.
    • Handle: RePEc:aen:journl:2009v30-04-a05
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    Cited by:

    1. Lutz Kilian & Xiaoqing Zhou, 2023. "The Econometrics of Oil Market VAR Models," Advances in Econometrics, in: Essays in Honor of Joon Y. Park: Econometric Methodology in Empirical Applications, volume 45, pages 65-95, Emerald Group Publishing Limited.
    2. Huang, Shupei & An, Haizhong & Wen, Shaobo & An, Feng, 2017. "Revisiting driving factors of oil price shocks across time scales," Energy, Elsevier, vol. 139(C), pages 617-629.
    3. Zakaria, Muhammad & Khiam, Shahzeb & Mahmood, Hamid, 2021. "Influence of oil prices on inflation in South Asia: Some new evidence," Resources Policy, Elsevier, vol. 71(C).
    4. Chou, Kuo-Wei & Tseng, Yi-Heng, 2016. "Oil prices, exchange rate, and the price asymmetry in the Taiwanese retail gasoline market," Economic Modelling, Elsevier, vol. 52(PB), pages 733-741.
    5. Pal, Debdatta & Mitra, Subrata Kumar, 2019. "Asymmetric oil price transmission to the purchasing power of the U.S. dollar: A multiple threshold NARDL modelling approach," Resources Policy, Elsevier, vol. 64(C).
    6. Castillo, Paul & Montoro, Carlos & Tuesta, Vicente, 2020. "Inflation, oil price volatility and monetary policy," Journal of Macroeconomics, Elsevier, vol. 66(C).
    7. Semei Coronado & Rebeca Jim'enez-Rodr'iguez & Omar Rojas, 2015. "An empirical analysis of the relationships between crude oil, gold and stock markets," Papers 1510.07599, arXiv.org, revised May 2016.
    8. Chang, Kuang-Liang, 2012. "Volatility regimes, asymmetric basis effects and forecasting performance: An empirical investigation of the WTI crude oil futures market," Energy Economics, Elsevier, vol. 34(1), pages 294-306.

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    JEL classification:

    • F0 - International Economics - - General

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