oil price and inflation

oil price and inflation - Do High Oil Prices Presage...

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Do High Oil Prices Presage Inflation? The Evidence from G-5 Countries By Michael LeBlanc Economic Research Service U.S. Department of Agriculture and Menzie D. Chinn LaFollette School of Public Affairs, University of Wisconsin Dept. of Economics, University of California, Santa Cruz February 19, 2004 Acknowledgements: We thank two anonymous referees and the editor Robert Crow for their helpful comments. Part of this work was conducted while the authors were staff members of the Council of Economic Advisers. None of the conclusions should be interpreted as representing the views of the U.S. Government or any other institutions the authors have been or are currently affiliated with. Correspondence: LeBlanc: Economic Research Service, 1800 M Street, NW, Washington, DC 20036. Tel.: (202) 694-5403. Email: [email protected] . Chinn: Economics Dept., University of Wisconsin, 1180 Observatory Drive, Madison, WI 53706. Tel.: (608) 262-7397. Email: [email protected] .
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2 Do High Oil Prices Presage Inflation? The Evidence fromG-5 Countries Abstract: We estimate the effects of oil price changes on inflation for the United States, United Kingdom, France, Germany, and Japan using an augmented Phillips curve framework. We supplement the traditional Phillips curve approach taking into account the growing body of evidence suggesting that oil prices may have asymmetric and nonlinear effects on output and that structural instabilities may exist in those relationships. Our statistical estimates suggest current oil price increases are likely to have only a modest effect on inflation in the U.S, Japan, and Europe. Oil price increases of as much as 10 percentage points will lead to direct inflationary increases of about 0.1-0.8 percentage points in the U.S. and the E.U. Inflation in Europe, traditionally thought to be more sensitive to oil prices than in the U.S., is unlikely to show any significant difference in sensitivity from that in the United States and in fact may be less in some countries. Keywords: inflation, Phillips curve, oil prices, exchange rates. JEL Classification: E3, C2
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3 Introduction Movements in oil prices have complicated the tasks of policymakers and business leaders over the past three decades. Increases in inflation during the 1970’s have been blamed, in part, upon rapid increases in petroleum prices. The long decline in inflation during the 1980’s and 1990’s have in turn been associated with declines in oil prices. Hence, a clear understanding of the strength of the empirical linkage between oil price changes and inflation is key to the proper conduct of monetary policy. To the extent that firms must alter their pricing policies according to the inflationary environment, firm managers also need to perceive the links accurately. While most of the examples that come to mind are historical in nature, it would be a mistake to conclude that the impact of oil prices on the macroeconomy is now unimportant. For instance, we are more familiar with, in September 2000, crude oil prices in the United States reached $37 per barrel, more than tripling from levels in December 1998.
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This note was uploaded on 04/26/2008 for the course ECN 115 taught by Professor Jia during the Summer '06 term at Northeastern.

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oil price and inflation - Do High Oil Prices Presage...

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