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Another Pass-Through Bites The Dust? Oil Prices And Inflation

  • José De Gregorio
  • Oscar Landerretche
  • Christopher Neilson

This paper presents evidence of an important decline during recent decades in the pass-through from the price of oil to the general price level. We find that this decline is a generalized fact for a large set of countries. After documenting correlations between the consumer price index and oil prices, we use two estimation strategies in an attempt to properly identify the effect of oil shocks on inflation. First, we estimate the traditional Phillips curve augmented to include oil and test for structural breaks in 34 countries. This methodology shows a fall in the average estimated pass-through for industrial economies and, to a lesser degree, for emerging economies. Second, we estimate rolling vector autoregressions for a subsample of countries for which we have sufficient data. We derive impulse response functions of inflation to oil shocks and interpret the integrals as estimates of pass-through. We find that the effect of oil shocks on inflation has weakened for most of the 12 countries in the sample. Among the factors that might help to explain this decline, we argue that the most important are a reduction in the oil intensity of economies around the world, a reduction in the exchange rate pass-through, a more favorable inflation environment, and the fact that the current oil price shock is largely the result of strong world demand. These factors help to explain not only why the current shock has had limited inflationary effects, but also why it has had limited consequences for output.

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Paper provided by University of Chile, Department of Economics in its series Working Papers with number wp238.

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Date of creation: May 2007
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Handle: RePEc:udc:wpaper:wp238
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