EconPapers    
Economics at your fingertips  
 

The Impact of Oil Price Changes on Growth and Inflation

Martin Schneider ()

Monetary Policy & the Economy, 2004, issue 2, 27–36

Abstract: This contribution looks into the impact of oil price changes on growth and inflation. Oil price shocks affect the economy through the supply side (higher production costs, reallocation of resources), the demand side (income effects, uncertainties) and the terms of trade. The effects of oil price shocks have become less intense over time (thanks to technological innovation, the development of cost-effective alternative sources of energy, sectoral change and the structural change of the oil market) and are asymmetric. An increase in the price of oil feeds through to GDP growth to a much larger extent than a decline, a phenomenon that can be attributed to adjustment costs associated with sectoral reallocations, the implications of uncertainties for spending on consumer durables and investment, and nominal wage rigidities. Furthermore, the element of surprise in oil price hikes seems to play a considerable role. Thus, when a rise in the price of oil occurs after a prolonged period of oil price stability, it has a larger impact than a price hike which immediately follows previous cuts. The role of monetary policy is still a controversial issue. According to some authors, a tightening of monetary policy following an oil price shock has a much more severe impact than the direct effects of the oil price shock themselves. However, empirical evidence on this matter is ambiguous. Current simulations for the euro area, the U.S.A. and Japan show that a constant oil price rise of 10% generates negative growth effects of some 0.1% a year in the first three years — not taking into account monetary responses. After that, the negative effects quickly fade. The impact on inflation ranges from 0.1 to 0.2 percentage point, with Austria at the lower end of the international spectrum. A simulation of the effects caused by the oil price remaining stable at USD 40 as of the third quarter of 2004 instead of falling to USD 29.2 until 2006 — as assumed in the OeNB Spring 2004 Outlook — would slow down growth in Austria by 0.03 percentage point in 2004 and by 0.2 percentage point in both 2005 and 2006. Inflation would be 0.1, 0.4 and 0.3 percentage point higher in 2004, 2005 and 2006, respectively.

Keywords: Prices; inflation; growth; oil (search for similar items in EconPapers)
Date: 2004
References: Add references at CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
https://www.oenb.at/dam/jcr:db783f84-1942-48d3-bfe ... pact_tcm16-19678.pdf (application/pdf)

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: https://EconPapers.repec.org/RePEc:onb:oenbmp:y:2004:i:2:b:1

Ordering information: This journal article can be ordered from
Oesterreichische Nationalbank, Documentation Management and Communications Services, Otto-Wagner Platz 3, A-1090 Vienna, Austria

Access Statistics for this article

Monetary Policy & the Economy is currently edited by Doris Ritzberger-Gruenwald and Ernest Gnan

More articles in Monetary Policy & the Economy from Oesterreichische Nationalbank (Austrian Central Bank) P.O. Box 61, A-1011 Vienna, Austria. Contact information at EDIRC.
Bibliographic data for series maintained by Claudia Kwapil ().

 
Page updated 2019-10-30
Handle: RePEc:onb:oenbmp:y:2004:i:2:b:1