Economics at your fingertips  

Asymmetries in the transmission of oil price shocks to inflation in the eurozone

Antonio J. Garzon and Luis Hierro

Economic Modelling, 2021, vol. 105, issue C

Abstract: Theory predicts that the level of inflation in an economy and the trend in the prevailing inflation rate may affect how oil price shocks, through their influence on firms’ expectations and price-setting behaviors, are transmitted to inflation. However, empirical evidence regarding this relationship is limited and calls for further exploration. Using data for 12 eurozone countries over the period from 1999 to 2020, we analyze how the inflation environment in which an oil price shock occurs influences its transmission. We find that the inflation environment is a determinant in the way oil supply shocks and oil-specific demand shocks are transmitted to inflation, with positive shocks displaying higher transmission in high inflation environments. Furthermore, transmission of shocks to core inflation, which represents an indirect effect, only occurs in high inflation environments. These findings highlight the need to consider the inflation environment in order to define appropriate monetary policies in response to inflationary pressures caused by oil price shocks.

Keywords: Oil price shocks; Inflation; State-dependent; Asymmetry (search for similar items in EconPapers)
JEL-codes: E31 E37 Q43 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.econmod.2021.105665

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2023-05-18
Handle: RePEc:eee:ecmode:v:105:y:2021:i:c:s0264999321002546