IDEAS home Printed from https://ideas.repec.org/p/bdi/opques/qef_792_23.html
   My bibliography  Save this paper

Energy price shocks and inflation in the euro area

Author

Listed:
  • Stefano Neri

    (Bank of Italy)

  • Fabio Busetti

    (Bank of Italy)

  • Cristina Conflitti

    (Bank of Italy)

  • Francesco Corsello

    (Bank of Italy)

  • Davide Delle Monache

    (Bank of Italy)

  • Alex Tagliabracci

    (Bank of Italy)

Abstract

This paper evaluates the role of supply shocks in driving inflation in the euro area since mid-2021, focusing in particular on shocks to energy prices. The analysis uses different empirical models (including Vector AutoRegressive models, time-varying Phillips curves and dynamic factor models) and shows that shocks to energy prices have had both direct and indirect effects on inflation. The contribution of these shocks to headline inflation is estimated to be around 60 per cent in the fourth quarter of 2022, while that to core inflation to range from 20 to 50 per cent, depending on the model. There is also evidence of an increase in the pass-through of energy prices to core inflation following the outbreak of the pandemic.

Suggested Citation

  • Stefano Neri & Fabio Busetti & Cristina Conflitti & Francesco Corsello & Davide Delle Monache & Alex Tagliabracci, 2023. "Energy price shocks and inflation in the euro area," Questioni di Economia e Finanza (Occasional Papers) 792, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_792_23
    as

    Download full text from publisher

    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2023-0792/QEF_792_23.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
    2. Forni, Mario & Lippi, Marco, 2001. "The Generalized Dynamic Factor Model: Representation Theory," Econometric Theory, Cambridge University Press, vol. 17(6), pages 1113-1141, December.
    3. Neri, Stefano, 2023. "Long-term inflation expectations and monetary policy in the euro area before the pandemic," European Economic Review, Elsevier, vol. 154(C).
    4. Corsello, Francesco & Neri, Stefano & Tagliabracci, Alex, 2021. "Anchored or de-anchored? That is the question," European Journal of Political Economy, Elsevier, vol. 69(C).
    5. Litterman, Robert B, 1986. "Forecasting with Bayesian Vector Autoregressions-Five Years of Experience," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(1), pages 25-38, January.
    6. Fabio Busetti & Michele Caivano & Davide Delle Monache, 2021. "Domestic and Global Determinants of Inflation: Evidence from Expectile Regression," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(4), pages 982-1001, August.
    7. Juan F. Rubio-Ramírez & Daniel F. Waggoner & Tao Zha, 2010. "Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 665-696.
    8. Lutz Kilian, 2014. "Oil Price Shocks: Causes and Consequences," Annual Review of Resource Economics, Annual Reviews, vol. 6(1), pages 133-154, October.
    9. Canova, Fabio & Paustian, Matthias, 2011. "Business cycle measurement with some theory," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 345-361.
    10. Christiane Baumeister & Lutz Kilian, 2014. "Do oil price increases cause higher food prices? [Biofuels, binding constraints, and agricultural commodity price volatility]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 29(80), pages 691-747.
    11. Andrea Carriero & Francesco Corsello & Massimiliano Marcellino, 2022. "The global component of inflation volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(4), pages 700-721, June.
    12. Cristina Conflitti and Matteo Luciani, 2019. "Oil Price Pass-through into Core Inflation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    13. repec:oup:ecpoli:v:29:y:2014:i:80:p:691-747 is not listed on IDEAS
    14. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
    15. Giraitis, L. & Kapetanios, G. & Yates, T., 2014. "Inference on stochastic time-varying coefficient models," Journal of Econometrics, Elsevier, vol. 179(1), pages 46-65.
    16. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983. "Forecasting and Conditional Projection Using Realistic Prior Distributions," NBER Working Papers 1202, National Bureau of Economic Research, Inc.
    17. Krippner, Leo, 2013. "Measuring the stance of monetary policy in zero lower bound environments," Economics Letters, Elsevier, vol. 118(1), pages 135-138.
    18. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
    19. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    20. Cristina Conflitti, 2020. "Alternative measures of underlying inflation in the euro area," Questioni di Economia e Finanza (Occasional Papers) 593, Bank of Italy, Economic Research and International Relations Area.
    21. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    22. Canova, Fabio & Nicolo, Gianni De, 2002. "Monetary disturbances matter for business fluctuations in the G-7," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1131-1159, September.
    23. Koester, Gerrit & Grapow, Helen, 2021. "The prevalence of private sector wage indexation in the euro area and its potential role for the impact of inflation on wages," Economic Bulletin Boxes, European Central Bank, vol. 7.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    1. Adolfsen, Jakob Feveile & Ferrari Minesso, Massimo & Mork, Jente Esther & Van Robays, Ine, 2024. "Gas price shocks and euro area inflation," Working Paper Series 2905, European Central Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Neri, Stefano, 2023. "Long-term inflation expectations and monetary policy in the euro area before the pandemic," European Economic Review, Elsevier, vol. 154(C).
    2. Liu, Donghui & Meng, Lingjie & Wang, Yudong, 2020. "Oil price shocks and Chinese economy revisited: New evidence from SVAR model with sign restrictions," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 20-32.
    3. Robin Braun & Ralf Brüggemann, 2017. "Identification of SVAR Models by Combining Sign Restrictions With External Instruments," Working Paper Series of the Department of Economics, University of Konstanz 2017-07, Department of Economics, University of Konstanz.
    4. Stock, J.H. & Watson, M.W., 2016. "Dynamic Factor Models, Factor-Augmented Vector Autoregressions, and Structural Vector Autoregressions in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 415-525, Elsevier.
    5. Herwartz, Helmut & Rohloff, Hannes & Wang, Shu, 2022. "Proxy SVAR identification of monetary policy shocks - Monte Carlo evidence and insights for the US," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    6. Francesco Corsello & Alex Tagliabracci, 2023. "Assessing the pass-through of energy prices to inflation in the euro area," Questioni di Economia e Finanza (Occasional Papers) 745, Bank of Italy, Economic Research and International Relations Area.
    7. Neri, Stefano & Nobili, Andrea & Conti, Antonio M., 2017. "Low inflation and monetary policy in the euro area," Working Paper Series 2005, European Central Bank.
    8. Abiad, Abdul & Qureshi, Irfan A., 2023. "The macroeconomic effects of oil price uncertainty," Energy Economics, Elsevier, vol. 125(C).
    9. Miranda-Agrippino, Silvia & Ricco, Giovanni, 2018. "Bayesian Vector Autoregressions," The Warwick Economics Research Paper Series (TWERPS) 1159, University of Warwick, Department of Economics.
    10. Carlo A. Favero, 2007. "Model Evaluation in Macroeconometrics: from early empirical macroeconomic models to DSGE models," Working Papers 327, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    11. Gondo, Rocío & Pérez, Fernando, 2018. "The Transmission of Exogenous Commodity and Oil Prices shocks to Latin America - A Panel VAR approach," Working Papers 2018-012, Banco Central de Reserva del Perú.
    12. Kabundi, Alain & De Simone, Francisco Nadal, 2020. "Monetary policy and systemic risk-taking in the euro area banking sector," Economic Modelling, Elsevier, vol. 91(C), pages 736-758.
    13. Inoue, Atsushi & Kilian, Lutz, 2013. "Inference on impulse response functions in structural VAR models," Journal of Econometrics, Elsevier, vol. 177(1), pages 1-13.
    14. Cristina Conflitti and Matteo Luciani, 2019. "Oil Price Pass-through into Core Inflation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    15. Kilian, Lutz, 2022. "Facts and fiction in oil market modeling," Energy Economics, Elsevier, vol. 110(C).
    16. Dias, Gustavo Fruet & Kapetanios, George, 2018. "Estimation and forecasting in vector autoregressive moving average models for rich datasets," Journal of Econometrics, Elsevier, vol. 202(1), pages 75-91.
    17. Dominik Bertsche, 2019. "The effects of oil supply shocks on the macroeconomy: a Proxy-FAVAR approachThe effects of oil supply shocks on the macroeconomy: a Proxy-FAVAR approach," Working Paper Series of the Department of Economics, University of Konstanz 2019-06, Department of Economics, University of Konstanz.
    18. Jin, Xisong & Nadal De Simone, Francisco, 2020. "Monetary policy and systemic risk-taking in the Euro area investment fund industry: A structural factor-augmented vector autoregression analysis," Journal of Financial Stability, Elsevier, vol. 49(C).
    19. Wieladek, Tomasz & Hjortsø, Ida & Weale, Martin, 2016. "Monetary Policy and the Current Account: Theory and Evidence," CEPR Discussion Papers 11204, C.E.P.R. Discussion Papers.
    20. Chudik, Alexander & Pesaran, M. Hashem, 2011. "Infinite-dimensional VARs and factor models," Journal of Econometrics, Elsevier, vol. 163(1), pages 4-22, July.

    More about this item

    Keywords

    inflation; energy prices; structural VAR; time-varying Phillips curve; Dynamic Factor model;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bdi:opques:qef_792_23. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bdigvit.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.