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The time-varying effects of oil news on inflation

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  • Herrera, Ana María
  • Rangaraju, Sandeep Kumar

Abstract

We investigate whether the effect of exogenous variations in oil prices on inflation has changed over time. We employ a Bayesian time-varying parameter vector autoregressive (TVP-VAR) model that identifies oil price shocks via a proxy variable. We first estimate a TVP version of Känzig (2021)’s VAR model where the proxy is constructed by summing surprise changes in daily oil futures prices around OPEC announcements. We find evidence that the dynamic response of oil production is non-negative for all points in the sample and the contemporaneous response of global economic activity is positive for some periods, casting doubt on the narrative that oil news captures expectations of future reductions in oil supply. We then compare the results with a Kilian (2024)-type TVP-VAR, which exhibits a higher reliability statistic and impulse response functions that indicate that OPEC news captures oil demand news. While this model captures a modest degree of time-variation in the inflation responses, especially in expansionary periods, its credible regions also accommodate time invariant responses.

Suggested Citation

  • Herrera, Ana María & Rangaraju, Sandeep Kumar, 2025. "The time-varying effects of oil news on inflation," Energy Economics, Elsevier, vol. 152(C).
    • Handle: RePEc:eee:eneeco:v:152:y:2025:i:c:s014098832500787x
    DOI: 10.1016/j.eneco.2025.108960
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    References listed on IDEAS

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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