Do all oil price shocks have the same impact? Evidence from the Euro Area

In setting policy, central banks need to understand the impact of oil prices on inflation. During the euro area financial and sovereign debt crisis, oil price shocks drove inflation up, while since mid-2014, large negative oil price shocks have been contributed to deflationary pressures in the euro area. This Letter considers whether the impact of oil price shocks is different in periods of uncertainty, such as the financial crisis, and whether positive and negative, large and small oil price shocks affect inflation differently. The findings suggest that there are significant differences in the impact in all these cases; which should be taken into account by policy makers when they are choosing how to respond to oil price shocks