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Oil Prices, Monetary Policy and Inflation Surges

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  • Luca Gagliardone
  • Mark Gertler

Abstract

We develop a simple quantitative New Keynesian model aimed at accounting for the recent sudden and persistent rise in inflation, with emphasis on the role of oil shocks and accommodative monetary policy. The model features oil as a complementary good for households and as a complementary input for firms. It also allows for unemployment and real wage rigidity. We estimate the key parameters by matching model impulse responses to those from identified money and oil shocks in a structural VAR. We then show that our model does a good job of explaining unemployment and inflation since 2010, including the recent inflation surge that began in mid 2021. We show that mainly accounting for this surge was a combination oil price shocks and “easy” monetary policy, even after allowing for demand shocks and shocks to labor market tightness. Important for the quantitative impact of the oil price shock is a low elasticity of substitution between oil and labor, which we estimate to be the case.

Suggested Citation

  • Luca Gagliardone & Mark Gertler, 2023. "Oil Prices, Monetary Policy and Inflation Surges," NBER Working Papers 31263, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31263
    Note: EFG ME
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    Cited by:

    1. Cardani, Roberta & Pfeiffer, Philipp & Ratto, Marco & Vogel, Lukas, 2023. "The COVID-19 recession on both sides of the Atlantic: A model-based comparison," European Economic Review, Elsevier, vol. 158(C).
    2. Chan, Jenny & Diz, Sebastian & Kanngiesser, Derrick, 2022. "Energy Prices and Household Heterogeneity: Monetary Policy in a Gas-TANK," MPRA Paper 118543, University Library of Munich, Germany, revised Dec 2022.
    3. Lutz Kilian & Xiaoqing Zhou, 2023. "Oil Price Shocks and Inflation," Working Papers 2312, Federal Reserve Bank of Dallas.
    4. Lutz Kilian, 2023. "How to Construct Monthly VAR Proxies Based on Daily Futures Market Surprises," Working Papers 2310, Federal Reserve Bank of Dallas.
    5. Philippe Goulet Coulombe & Karin Klieber & Christophe Barrette & Maximilian Goebel, 2024. "Maximally Forward-Looking Core Inflation," Papers 2404.05209, arXiv.org.
    6. Christiane Baumeister, 2023. "Pandemic, War, Inflation: Oil Markets at a Crossroads?," NBER Working Papers 31496, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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