IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/15168.html
   My bibliography  Save this paper

Oil Prices, Gasoline Prices and Inflation Expectations: A New Model and New Facts

Author

Listed:
  • Kilian, Lutz
  • Zhou, Xiaoqing

Abstract

The conventional wisdom that inflation expectations respond to the level of the price of oil (or the price of gasoline) is based on testing the null hypothesis of a zero slope coefficient in a static single-equation regression model fit to aggregate data. Given that the regressor in this model is not stationary, the null distribution of the t-test statistic is nonstandard, invalidating the use of the normal approximation. Once the critical values are adjusted, these regressions provide no support for the conventional wisdom. Using a new structural vector regression model, however, we demonstrate that gasoline price shocks may indeed drive one-year household inflation expectations. The model shows that there have been several such episodes since 1990. In particular, the rise in household inflation expectations between 2009 and 2013 is almost entirely explained by a large increase in gasoline prices. However, on average, gasoline price shocks account for only 39% of the variation in household inflation expectations since 1981.

Suggested Citation

  • Kilian, Lutz & Zhou, Xiaoqing, 2020. "Oil Prices, Gasoline Prices and Inflation Expectations: A New Model and New Facts," CEPR Discussion Papers 15168, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:15168
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=15168
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Todd E. Clark & Stephen J. Terry, 2010. "Time Variation in the Inflation Passthrough of Energy Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1419-1433, October.
    2. Coibion, Olivier & Gorodnichenko, Yuriy & Kumar, Saten & Pedemonte, Mathieu, 2020. "Inflation expectations as a policy tool?," Journal of International Economics, Elsevier, vol. 124(C).
    3. Anderson, Soren T. & Kellogg, Ryan & Sallee, James M., 2013. "What do consumers believe about future gasoline prices?," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 383-403.
    4. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Is the Phillips Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 197-232, January.
    5. 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).
    6. Rupal Kamdar, 2019. "The Inattentive Consumer: Sentiment and Expectations," 2019 Meeting Papers 647, Society for Economic Dynamics.
    7. Lutz Kilian & Logan T. Lewis, 2011. "Does the Fed Respond to Oil Price Shocks?," Economic Journal, Royal Economic Society, vol. 121(555), pages 1047-1072, September.
    8. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-858, May.
    9. Lutz Kilian & Clara Vega, 2011. "Do Energy Prices Respond to U.S. Macroeconomic News? A Test of the Hypothesis of Predetermined Energy Prices," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 660-671, May.
    10. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
    11. Benjamin Wong, 2015. "Do Inflation Expectations Propagate the Inflationary Impact of Real Oil Price Shocks?: Evidence from the Michigan Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(8), pages 1673-1689, December.
    12. Binder, Carola Conces, 2018. "Inflation expectations and the price at the pump," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 1-18.
    13. Cristina Conflitti & Riccardo Cristadoro, 2018. "Oil prices and inflation expectations," Questioni di Economia e Finanza (Occasional Papers) 423, Bank of Italy, Economic Research and International Relations Area.
    14. Jonas E. Arias & Juan F. Rubio‐Ramírez & Daniel F. Waggoner, 2018. "Inference Based on Structural Vector Autoregressions Identified With Sign and Zero Restrictions: Theory and Applications," Econometrica, Econometric Society, vol. 86(2), pages 685-720, March.
    15. Chris Stewart, 2011. "A note on spurious significance in regressions involving I(0) and I(1) variables," Empirical Economics, Springer, vol. 41(3), pages 565-571, December.
    16. Carlos Madeira & Basit Zafar, 2015. "Heterogeneous Inflation Expectations and Learning," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(5), pages 867-896, August.
    17. Olivier Coibion & Yuriy Gorodnichenko & Rupal Kamdar, 2018. "The Formation of Expectations, Inflation, and the Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 56(4), pages 1447-1491, December.
    18. Kilian,Lutz & Lütkepohl,Helmut, 2018. "Structural Vector Autoregressive Analysis," Cambridge Books, Cambridge University Press, number 9781107196575, February.
    19. Lutz Kilian & Bruce Hicks, 2013. "Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003–2008?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(5), pages 385-394, August.
    20. Edelstein, Paul & Kilian, Lutz, 2009. "How sensitive are consumer expenditures to retail energy prices?," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 766-779, September.
    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. Atsushi Inoue & Lutz Kilian, 2020. "The Role of the Prior in Estimating VAR Models with Sign Restrictions," Working Papers 2030, Federal Reserve Bank of Dallas.
    2. Philipp F. M. Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org, revised Aug 2021.

    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. Geiger, Martin & Scharler, Johann, 2019. "How do consumers assess the macroeconomic effects of oil price fluctuations? Evidence from U.S. survey data," Journal of Macroeconomics, Elsevier, vol. 62(C).
    2. Feldkircher, Martin & Siklos, Pierre L., 2019. "Global inflation dynamics and inflation expectations," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 217-241.
    3. Kilian, Lutz & Zhou, Xiaoqing, 2019. "Oil Prices, Exchange Rates and Interest Rates," CEPR Discussion Papers 13478, C.E.P.R. Discussion Papers.
    4. Martin Geiger & Johann Scharler, 2018. "How do consumers interpret the macroeconomic effects of oil price fluctuations? Evidence from U.S. survey data," Working Papers 2018-13, Faculty of Economics and Statistics, University of Innsbruck.
    5. Lutz Kilian, 2010. "Oil Price Shocks, Monetary Policy and Stagflation," RBA Annual Conference Volume (Discontinued), in: Renée Fry & Callum Jones & Christopher Kent (ed.),Inflation in an Era of Relative Price Shocks, Reserve Bank of Australia.
    6. Binder, Carola Conces, 2018. "Inflation expectations and the price at the pump," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 1-18.
    7. Lang, Korbinian & Auer, Benjamin R., 2020. "The economic and financial properties of crude oil: A review," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    8. Benjamin Wong, 2015. "Do Inflation Expectations Propagate the Inflationary Impact of Real Oil Price Shocks?: Evidence from the Michigan Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(8), pages 1673-1689, December.
    9. Knotek, Edward S. & Zaman, Saeed, 2021. "Asymmetric responses of consumer spending to energy prices: A threshold VAR approach," Energy Economics, Elsevier, vol. 95(C).
    10. Christiane Baumeister & Lutz Kilian & Xiaoqing Zhou, 2017. "Is the Discretionary Income Effect of Oil Price Shocks a Hoax?," CESifo Working Paper Series 6369, CESifo.
    11. Lyu, Yifei, 2021. "Accounting for the declining economic effects of oil price shocks," Energy Economics, Elsevier, vol. 96(C).
    12. Fédéric Holm-Hadulla & Kirstin Hubrich, 2017. "Macroeconomic Implications of Oil Price Fluctuations : A Regime-Switching Framework for the Euro Area," Finance and Economics Discussion Series 2017-063, Board of Governors of the Federal Reserve System (U.S.).
    13. Christiane Baumeister & Lutz Kilian, 2014. "Do oil price increases cause higher food prices? [Biofuels, binding constraints, and agricultural commodity price volatility]," Economic Policy, CEPR;CES;MSH, vol. 29(80), pages 691-747.
    14. Abildgren, Kim & Kuchler, Andreas, 2021. "Revisiting the inflation perception conundrum," Journal of Macroeconomics, Elsevier, vol. 67(C).
    15. Lutz Kilian & Xiaoqing Zhou, 2020. "Does drawing down the US Strategic Petroleum Reserve help stabilize oil prices?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(6), pages 673-691, September.
    16. Olivier Coibion & Yuriy Gorodnichenko & Michael Weber & Michael Weber, 2019. "Monetary Policy Communications and their Effects on Household Inflation Expectations," CESifo Working Paper Series 7464, CESifo.
    17. Ratti, Ronald A. & Vespignani, Joaquin L., 2013. "Liquidity and crude oil prices: China's influence over 1996–2011," Economic Modelling, Elsevier, vol. 33(C), pages 517-525.
    18. Diegel, Max & Nautz, Dieter, 2020. "The role of long-term inflation expectations for the transmission of monetary policy shocks," Discussion Papers 2020/19, Free University Berlin, School of Business & Economics.
    19. Ioannidis, Christos & Ka, Kook, 2018. "The impact of oil price shocks on the term structure of interest rates," Energy Economics, Elsevier, vol. 72(C), pages 601-620.
    20. Jo, Soojin & Karnizova, Lilia & Reza, Abeer, 2019. "Industry effects of oil price shocks: A re-examination," Energy Economics, Elsevier, vol. 82(C), pages 179-190.

    More about this item

    Keywords

    anchor; Expectations; gasoline price; Household survey; inflation; missing disinflation; oil price;
    All these keywords.

    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
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

    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:cpr:ceprdp:15168. 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: . General contact details of provider: https://www.cepr.org .

    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: (email available below). General contact details of provider: https://www.cepr.org .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.