IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Changes in the oil price-inflation pass-through

Author Info

  • Valcarcel, Victor J.
  • Wohar, Mark E.

Abstract

We estimate a Bayesian structural vector autoregression that allows for time-varying parameters and stochastic volatility in the errors to account for the effects of various aggregate shocks on the real price of oil. We employ US quarterly data from 1948:Q1 to 2011:Q2. We find that aggregate supply (‘AS’) shocks have a meaningful effect on oil prices only during the 1970s and early 1980s. Our estimates suggest that since the Great Moderation period, oil prices respond more to aggregate demand (‘AD’) than ‘AS’ shocks and the volatility in oil prices does not seem to be contagious for the volatility in overall inflation. Our results also imply a flattening of the Phillips Curve in the 1990s and 2000s. A preponderance of evidence suggests that oil price-inflation pass-through may have shifted from a supply-side to a demand-side phenomenon. This has important implications for the ability of monetary policy makers to dampen the effects of adverse oil shocks on the aggregate economy.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S0148619513000246
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 68 (2013)
Issue (Month): C ()
Pages: 24-42

as
in new window

Handle: RePEc:eee:jebusi:v:68:y:2013:i:c:p:24-42
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconbus

Keywords: Oil prices; The Great Moderation; Stochastic volatility; Long-run restrictions; Sign restrictions; Markov Chain Monte Carlo; Structural vector autoregressions;

Find related papers by JEL classification:

  • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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.:

as in new window
  1. Kilian, Lutz, 2007. "The Economic Effects of Energy Price Shocks," CEPR Discussion Papers 6559, C.E.P.R. Discussion Papers.
  2. Fabio Canova & Gianni De Nicolo, 2000. "Monetary disturbances matter for business fluctuations in the G-7," International Finance Discussion Papers 660, Board of Governors of the Federal Reserve System (U.S.).
  3. Uhlig, Harald, 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," CEPR Discussion Papers 2137, C.E.P.R. Discussion Papers.
  4. Barsky, Robert & Kilian, Lutz, 2004. "Oil and the Macroeconomy Since the 1970s," CEPR Discussion Papers 4496, C.E.P.R. Discussion Papers.
  5. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  6. Kevin L. Kliesen, 2008. "Oil and the U.S. macroeconomy: an update and a simple forecasting exercise," Working Papers 2008-009, Federal Reserve Bank of St. Louis.
  7. Gabriel Perez-Quiros & Margaret M. McConnell, 2000. "Output Fluctuations in the United States: What Has Changed since the Early 1980's?," American Economic Review, American Economic Association, vol. 90(5), pages 1464-1476, December.
  8. Alejandro Justiniano & Giorgio E. Primiceri, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," NBER Working Papers 12022, National Bureau of Economic Research, Inc.
  9. Jon Faust, 1998. "The robustness of identified VAR conclusions about money," International Finance Discussion Papers 610, Board of Governors of the Federal Reserve System (U.S.).
  10. Jordi Galí & Luca Gambetti, 2006. "On the sources of the Great Moderation," Economics Working Papers 1041, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2007.
  11. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  12. Hamilton, James D., 2011. "Nonlinearities And The Macroeconomic Effects Of Oil Prices," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S3), pages 364-378, November.
  13. Gert Peersman & Ine Van Robays, 2009. "Oil and the Euro area economy," Economic Policy, CEPR;CES;MSH, vol. 24, pages 603-651, October.
  14. Kilian, Lutz & Park, Cheolbeom, 2007. "The Impact of Oil Price Shocks on the U.S. Stock Market," CEPR Discussion Papers 6166, C.E.P.R. Discussion Papers.
  15. Marc Gronwald, 2008. "Large Oil Shocks and the US Economy: Infrequent Incidents with Large Effects," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 151-172.
  16. Lutz Kilian & Robert J. Vigfusson, 2009. "Pitfalls in estimating asymmetric effects of energy price shocks," International Finance Discussion Papers 970, Board of Governors of the Federal Reserve System (U.S.).
  17. 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.
  18. Peter M. Summers, 2005. "What caused the Great Moderation? : some cross-country evidence," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-32.
  19. Thomas B. King & James Morley, 2005. "In search of the natural rate of unemployment," Supervisory Policy Analysis Working Papers 2005-05, Federal Reserve Bank of St. Louis.
  20. Kilian, Lutz & Vigfusson, Robert J., 2011. "Nonlinearities In The Oil Price–Output Relationship," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S3), pages 337-363, November.
  21. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
  22. Keating, John W. & Valcarcel, Victor J., 2015. "The Time-Varying Effects Of Permanent And Transitory Shocks To Real Output," Macroeconomic Dynamics, Cambridge University Press, vol. 19(03), pages 477-507, April.
  23. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
  24. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 1994. "Bayesian Analysis of Stochastic Volatility Models: Comments: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 413-17, October.
  25. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," International Finance Discussion Papers 462, Board of Governors of the Federal Reserve System (U.S.).
  26. Stephen P.A. Brown & Mine K. Yücel, 1999. "Oil prices and U.S. aggregate economic activity: a question of neutrality," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 16-23.
  27. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October.
  28. Renee Fry & Adrian Pagan, 2010. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," NCER Working Paper Series 57, National Centre for Econometric Research.
  29. Hamilton, James D, 1988. "A Neoclassical Model of Unemployment and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 593-617, June.
  30. John W. Keating & Victor J. Valcarcel, 2012. "What's so Great about the Great Moderation? A Multi-Country Investigation of Time-Varying Volatilities of Output Growth and Inflation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201204, University of Kansas, Department of Economics.
  31. Francesco Lippi & Andrea Nobili, 2009. "Oil and the macroeconomy: a quantitative structural analysis," Temi di discussione (Economic working papers) 704, Bank of Italy, Economic Research and International Relations Area.
  32. Christiane Baumeister & Gert Peersman & Ine Van Robays, 2010. "The Economic Consequences of Oil Shocks: Differences across Countries and Time," RBA Annual Conference Volume, in: Renée Fry & Callum Jones & Christopher Kent (ed.), Inflation in an Era of Relative Price Shocks Reserve Bank of Australia.
  33. Fabio Canova & Matthias Paustian, 2010. "Measurement with Some Theory: a New Approach to Evaluate Business Cycle Models (with appendices)," Working Papers 511, Barcelona Graduate School of Economics.
  34. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-44, June.
  35. Herrera, Ana María & Pesavento, Elena, 2009. "Oil Price Shocks, Systematic Monetary Policy, And The “Great Moderation”," Macroeconomic Dynamics, Cambridge University Press, vol. 13(01), pages 107-137, February.
  36. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October.
  37. Todd E. Clark, 2009. "Is the Great Moderation over? an empirical analysis," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-42.
  38. Faust, Jon, 1998. "The robustness of identified VAR conclusions about money," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 207-244, December.
  39. Donald W. Jones, Paul N. Leiby and Inja K. Paik, 2004. "Oil Price Shocks and the Macroeconomy: What Has Been Learned Since 1996," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-32.
  40. Peter Ferderer, J., 1996. "Oil price volatility and the macroeconomy," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 1-26.
  41. Ichiro Fukunaga & Naohisa Hirakata & Nao Sudo, 2010. "The Effects of Oil Price Changes on the Industry-Level Production and Prices in the U.S. and Japan," NBER Working Papers 15791, National Bureau of Economic Research, Inc.
  42. Bjornland, Hilde Christiane, 2000. "The Dynamic Effects of Aggregate Demand, Supply and Oil Price Shocks--A Comparative Study," Manchester School, University of Manchester, vol. 68(5), pages 578-607, September.
  43. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 2002. "Bayesian Analysis of Stochastic Volatility Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 69-87, January.
  44. Jiménez-Rodríguez, Rebeca & Sánchez, Marcelo, 2004. "Oil price shocks and real GDP growth: empirical evidence for some OECD countries," Working Paper Series 0362, European Central Bank.
  45. Rebeca Jimenez-Rodriguez, 2011. "Macroeconomic Structure and Oil Price Shocks at the Industrial Level," International Economic Journal, Taylor & Francis Journals, vol. 25(1), pages 173-189.
  46. Lutz Kilian & Robert J. Vigfusson, 2011. "Are the responses of the U.S. economy asymmetric in energy price increases and decreases?," Quantitative Economics, Econometric Society, vol. 2(3), pages 419-453, November.
  47. 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.
  48. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
  49. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August.
  50. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers 870, Cowles Foundation for Research in Economics, Yale University.
  51. Lee, Kiseok & Ni, Shawn, 2002. "On the dynamic effects of oil price shocks: a study using industry level data," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 823-852, May.
  52. John W. Keating, 1992. "Structural approaches to vector autoregressions," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 37-57.
  53. Granger Clive W.J., 2008. "Non-Linear Models: Where Do We Go Next - Time Varying Parameter Models?," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(3), pages 1-11, September.
  54. 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.
  55. C. Baumeister & G. Peersman & -, 2010. "Sources of the Volatility Puzzle in the Crude Oil Market," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/634, Ghent University, Faculty of Economics and Business Administration.
  56. Valcarcel, Victor J., 2012. "The dynamic adjustments of stock prices to inflation disturbances," Journal of Economics and Business, Elsevier, vol. 64(2), pages 117-144.
  57. 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.
  58. anonymous, 2008. "Financial turmoil and the economy," Annual Report, Federal Reserve Bank of San Francisco, pages 6-14.
  59. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 85-106.
  60. Keating, John W & Nye, John V, 1998. "Permanent and Transitory Shocks in Real Output: Estimates from Nineteenth-Century and Postwar Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(2), pages 231-51, May.
  61. Jiménez-Rodríguez, Rebeca, 2008. "The impact of oil price shocks: Evidence from the industries of six OECD countries," Energy Economics, Elsevier, vol. 30(6), pages 3095-3108, November.
  62. Herrera, Ana María & Lagalo, Latika Gupta & Wada, Tatsuma, 2011. "Oil Price Shocks And Industrial Production: Is The Relationship Linear?," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S3), pages 472-497, November.
  63. Knut Anton Mork, 1994. "Business Cycles and the Oil Market," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 15-38.
Full references (including those not matched with items on IDEAS)

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

as in new window


Cited by:

  1. KARGI, Bilal, 2014. "The Effects of Oil Prices On Inflation and Growth: Time Series Analysis In Turkish Economy For 1988:01-2013:04 Period," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 29-36.
  2. Dedeoğlu, Dinçer & Kaya, Hüseyin, 2014. "Pass-through of oil prices to domestic prices: Evidence from an oil-hungry but oil-poor emerging market," Economic Modelling, Elsevier, vol. 43(C), pages 67-74.
  3. Konstantakis, Konstantinos N. & Michaelides, Panayotis G., 2014. "Transmission of the debt crisis: From EU15 to USA or vice versa? A GVAR approach," Journal of Economics and Business, Elsevier, vol. 76(C), pages 115-132.
  4. Abbas Ali Abounoori & Rafik Nazarian & Ashkan Amiri, 2014. "Oil Price Pass-Through into Domestic Inflation: The Case of Iran," International Journal of Energy Economics and Policy, Econjournals, vol. 4(4), pages 662-669.
  5. Tural Karimli & Nigar Jafarova & Heyran Aliyeva & Salman Huseynov, 2016. "Oil Price Pass-Through into Inflation: The Evidence from Oil Exporting Countries," IHEID Working Papers 01-2016, Economics Section, The Graduate Institute of International Studies.
  6. Bec, Frédérique & De Gaye, Annabelle, 2016. "How do oil price forecast errors impact inflation forecast errors? An empirical analysis from US, French and UK inflation forecasts," Economic Modelling, Elsevier, vol. 53(C), pages 75-88.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Access and download statistics

When requesting a correction, please mention this item's handle: RePEc:eee:jebusi:v:68:y:2013:i:c:p:24-42. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.