Time–frequency connectedness between heterogeneous oil price shocks and inflation: a comparative analysis of developed and emerging economies

Yushi Xu, Baifan Chen (), Jionghao Huang, Qingsha Hu and Shuning Kong
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Yushi Xu: China University of Petroleum, Beijing
Baifan Chen: Renmin University of China
Jionghao Huang: Peking University
Qingsha Hu: Hainan University
Shuning Kong: Renmin University of China

Economic Change and Restructuring, 2024, vol. 57, issue 6, No 85, 42 pages

Abstract: Abstract This study innovatively combines the structural vector autoregression model with a novel frequency connectedness approach to explore the dynamic connectedness between heterogeneous oil price shocks and inflation across both developed and emerging economies. By investigating the connectedness relationship between oil shocks and inflation from the G7 (Group of Seven countries) and BRICS (Brazil, Russia, India, China, and South Africa) countries, our findings reveal a significantly dynamic heterogeneous oil–inflation nexus. Firstly, our analysis reveals that oil supply shocks predominantly serve as receivers of inflation, whereas aggregate demand and oil-specific demand shocks primarily act as transmitters. Additionally, the connectedness between oil price shocks and inflation is mainly driven by long-term factors and exhibits notable time-varying characteristics, with significant increases in connectedness strength observed during periods of oil and financial crises. Lastly, our study shows that developed economies are more inclined to transmit shocks to the global crude oil market, while their vulnerability to external shocks from the international crude oil market is markedly heightened by greater resource dependence and a lack of self-sufficiency. This study not only provides a new perspective on understanding the intricate relationship between oil price shocks and inflation but also offers a crucial theoretical framework and empirical evidence to assist policymakers and investors in navigating the fluctuations of the global energy market.

Keywords: Heterogeneous oil price shocks; Oil–inflation nexus; Frequency connectedness approach; G7; BRICS (search for similar items in EconPapers)
JEL-codes: C32 C58 F36 G15 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10644-024-09836-1

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