Oil Prices and Inflation Dynamics: Evidence from Advanced and Developing Economies
IMF Working Papers, September 5, 2017
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- Oil Prices and Inflation Dynamics: Evidence from Advanced and Developing Economies
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Bibliographic details
- Authors: Sangyup Choi, Davide Furceri, Prakash Loungani, Saurabh Mishra, Marcos Poplawski Ribeiro
- Published: September 5, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484316658.001
Key findings
- A 10 percent increase in global oil inflation increases, on average, domestic inflation by about 0.4 percentage point on impact.
- The effect vanishes after two years.
- The average effect is similar between advanced and developing economies.
- The effect is asymmetric: positive oil price shocks have a larger effect than negative ones.
- The impact of oil price shocks has declined over time, due in large part to a better conduct of monetary policy.
- Cross-country variation in the recent period (2000 to 2015) is most robustly explained by the share of transport in the CPI basket and energy subsidies.
Transmission channels and heterogeneity
- Transport share in the CPI basket: identified as a robust factor explaining stronger pass-through of oil price shocks to domestic inflation.
- Energy subsidies: presence and extent of subsidies are robustly associated with cross-country differences in inflation responses to oil price shocks.
- Asymmetry: positive oil price shocks transmit more strongly to domestic inflation than negative shocks.
Temporal scope and data
- Panel dataset: unbalanced panel of 72 advanced and developing economies.
- Long-run sample period: 1970 to 2015.
- High-frequency analysis: monthly dataset covering 2000 to 2015.
- Paper length: 55 pages.
Dynamics and monetary policy
- Declining impact over time is attributed in large part to improved conduct of monetary policy.
- The immediate pass-through on impact is 0.4 percentage point for a 10 percent global oil inflation increase, disappearing after two years.
Policy implications
- Monetary policy improvements have reduced the inflationary impact of oil price shocks.
- Tailoring policy and inflation management should account for:
- CPI composition (notably the transport share).
- The presence and design of energy subsidies, which affect transmission.
Source: IMF Working Paper by Sangyup Choi, Davide Furceri, Prakash Loungani, Saurabh Mishra, and Marcos Poplawski Ribeiro (September 5, 2017).