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Energy Price Uncertainty and Decreasing Pass-through to Core Inflation

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  • Ahmed Jamal Pirzada

Abstract

This paper uses an extended version of the New Keynesian model to provide an alternate explanation for the decrease in energy price pass-through to core inflation. Results show that in a model with households' consumption of energy goods, uncertain energy prices decrease firms' responsiveness to an energy price shock. This is due to the upward pricing bias channel in firms' pricing decision. Since prices are sticky firms bias their prices upwards. The pricing bias provides cushion to firms against future cost shocks. Increase in energy price uncertainty further increases the magnitude of the bias. As a result, when a positive energy price shock hits the economy, firms require a smaller increase in their prices than they would have in absence of the pricing bias.

Suggested Citation

  • Ahmed Jamal Pirzada, 2017. "Energy Price Uncertainty and Decreasing Pass-through to Core Inflation," Bristol Economics Discussion Papers 17/681, Department of Economics, University of Bristol, UK, revised 30 May 2017.
  • Handle: RePEc:bri:uobdis:17/681
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    File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp17681.pdf
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    References listed on IDEAS

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    1. 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.
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    3. Rajeev Dhawan & Karsten Jeske, 2008. "Energy Price Shocks and the Macroeconomy: The Role of Consumer Durables," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1357-1377, October.
    4. Jae Sim & Egon Zakrajsek & Simon Gilchrist, 2010. "Uncertainty, Financial Frictions, and Investment Dynamics," 2010 Meeting Papers 1285, Society for Economic Dynamics.
    5. Yash P. Mehra & Bansi Sawhney, 2010. "Inflation measure, Taylor rules, and the Greenspan-Bernanke years," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 123-151.
    6. Engin Kara & Ahmed Jamal Pirzada, 2016. "A Possible Explanation of the Missing Deflation Puzzle," Bristol Economics Discussion Papers 16/670, Department of Economics, University of Bristol, UK, revised 29 Mar 2017.
    7. Born, Benjamin & Pfeifer, Johannes, 2014. "Policy risk and the business cycle," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 68-85.
    8. Apostolos Serletis, 2012. "Oil Price Uncertainty," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 8407, October.
    9. Mark Bils & Peter J. Klenow & Benjamin A. Malin, 2012. "Reset Price Inflation and the Impact of Monetary Policy Shocks," American Economic Review, American Economic Association, vol. 102(6), pages 2798-2825, October.
    10. Hooker, Mark A, 2002. "Are Oil Shocks Inflationary? Asymmetric and Nonlinear Specifications versus Changes in Regime," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 540-561, May.
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    Cited by:

    1. Ahmed Jamal Pirzada, 2017. "Price Stickiness and Intermediate Materials Prices," Bristol Economics Discussion Papers 17/686, Department of Economics, University of Bristol, UK.

    More about this item

    Keywords

    Energy Prices; Uncertainty; Inflation; Monetary Policy; DSGE.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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