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News shocks and inflation: theory and evidence from large oil discoveries

Author

Listed:
  • Bohou Cai
  • Liugang Sheng
  • Hongyan Zhao

Abstract

We study how news shocks affect inflation in open economies, using large oil and gas discoveries with realized production lags of at least five years as observable news about future output. Panel local projections show that discoveries raise core consumer prices over the subsequent decade, with about half the increase occurring prior to extraction. The response is driven by nontradables, while tradable and producer prices barely respond. The real exchange rate appreciates persistently and real activity expands ahead of extraction, while the current account first deteriorates and then improves as new oil comes online. The inflationary response is concentrated under inflexible exchange-rate regimes but muted under flexible ones. A three-sector New Keynesian small open economy model rationalizes these findings through competing demand and exchange rate channels, with exchange-rate policy determining which force dominates.

Suggested Citation

  • Bohou Cai & Liugang Sheng & Hongyan Zhao, 2026. "News shocks and inflation: theory and evidence from large oil discoveries," BIS Working Papers 1389, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1389
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    JEL classification:

    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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