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Revisiting the linkages between oil prices and macroeconomy for the euro area: Does energy inflation still matter?

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  • Jawadi, Fredj
  • Cheffou, Abdoulkarim Idi
  • Bu, Ruijun

Abstract

This study revisits the relationship between oil prices and the macroeconomy for the euro area while assessing the effects of recent energy inflation on the real economy. We particularly investigate the impact of energy inflation on the real sector (household consumption, firm investment, and economic growth), financial sector (inflation, financial market), and economic agents' confidence. Considering the monetary authority's recent actions, we review this oil price–macroeconomy relationship while taking into account the ongoing monetary policy to check the policy's efficiency and to assess whether the recent successive interventions of the European Central Bank (ECB) have attenuated the effects of energy inflation. We test these hypotheses in linear and nonlinear frameworks using threshold models that offer a flexible econometric modeling. Our results reveal two interesting findings. First, an oil price shift exerts a significant and nonlinear effect on the real and financial sectors. This impact is asymmetrical and varies by regime, depending on the economic situation (geopolitical tension, inflation, war in Ukraine, etc.). Additionally, we empirically and endogenously estimate the threshold level at which the impact of oil price changes is significant. Second, the reaction of economic growth and inflation rate to oil price shifts remains highly significant, even when considering the ongoing monetary policy of the ECB.

Suggested Citation

  • Jawadi, Fredj & Cheffou, Abdoulkarim Idi & Bu, Ruijun, 2023. "Revisiting the linkages between oil prices and macroeconomy for the euro area: Does energy inflation still matter?," Energy Economics, Elsevier, vol. 127(PA).
    • Handle: RePEc:eee:eneeco:v:127:y:2023:i:pa:s014098832300556x
    DOI: 10.1016/j.eneco.2023.107058
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    References listed on IDEAS

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    More about this item

    Keywords

    Oil Price shock; Energy inflation; Geopolitical tensions; Real economy; Financial sector; Nonlinearity; Threshold models;
    All these keywords.

    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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