An Assessment of the Inflationary Impact of Oil Shocks in the Euro Area

Abstract

This paper explores the links between oil prices and inflation in the euro area by means of a DSGE model reflecting the structure of the energy markets in the euro area and calibrated to match the data using reduced-form time series techniques. The analysis focuses on the impact on inflation (through the Harmonised Index of Consumer Prices (HICP) and its energy component) in the short and medium run. The main conclusion is that, in the short term, changes in oil prices are of vital importance for the understanding of inflation, but that at longer horizons their impact on inflation is much more complex and depends on the initial shock. An analysis of the sources of oil price increases remains therefore a pre-requisite for a proper understanding of historical fluctuations of oil prices and the related developments in the euro area, and for drawing policy conclusions.

Euro Area and Global Oil Shocks: An Empirical Model-Based Analysis

“…The change in the non-fuel component is much less pronounced, as nominal rigidities are relatively high and firms end up absorbing almost entirely the increase in production costs driven by higher fuel prices. Results are in line with those reported by ECB (2010) and Jacquinot et al (2009). Differently from the oil supply and oil-specific demand shocks, the positive RW demand shock has a positive effect on euro area exports and GDP.…”

“…Given the increase in the consumer price inflation, the monetary authority rises the policy rate, albeit slightly. The relatively small size of the interest rate increase reflects the short-lived variation in consumer price inflation and is in line with results reported in ECB (2010) and Jacquinot et al (2009). Households' consumption suffers a negative wealth effect associated with higher oil price (more below).…”

Vulnerability of the economy to the potential disturbances of energy supply: A logic-based model with application to the case of China

“…These models are often static, comparing for instance two years (Zaouali, 2007). Dynamic stochastic general equilibrium (DSGE) is the more advanced model in that category (Jacquinot et al, 2009). …”

“…Bernanke et al (1997) highlighted the contribution of the tightened monetary policy to the economic downturn that occurred after the 1973 oil price shock. Jacquinot et al (2009) analyzed the impact of oil shocks on the inflation in the Euro area and pointed out that the effects on inflation depend mostly on the origins of the prices' increase. An asymmetric link between oil prices and macroeconomic variables was identified as well (Hamilton, 1996;Davis and Haltiwanger, 2001).…”

Oil Price Fluctuations and it Impact on Economic Growth: A DSGE Approach.

“…Leduc and Sill (2004) and Medina and Soto (2005), examined the role of monetary policy as a transmission channel for oil shocks. In an experiment by Jacquinot et al (2009) and Nakov & Pescatori (2010a), they showed that different types of oil shocks engender distinct monetary policy reactions. A number of studies have also employed Bayesian estimation techniques to identify the sources of oil price shocks and to analyze its economic effects (Nakov and Pescatori, 2010b;Balke et al, 2010;Bodenstein and Guerrieri, 2011;Forni et al, 2012).…”