News shocks and inflation: theory and evidence from large oil discoveries

Bohou Cai, Liugang Sheng and Hongyan Zhao

No 1389, BIS Working Papers from Bank for International Settlements

Abstract: We study how news shocks affect inflation in open economies, using large oil and gas discoveries with realized production lags of at least five years as observable news about future output. Panel local projections show that discoveries raise core consumer prices over the subsequent decade, with about half the increase occurring prior to extraction. The response is driven by nontradables, while tradable and producer prices barely respond. The real exchange rate appreciates persistently and real activity expands ahead of extraction, while the current account first deteriorates and then improves as new oil comes online. The inflationary response is concentrated under inflexible exchange-rate regimes but muted under flexible ones. A three-sector New Keynesian small open economy model rationalizes these findings through competing demand and exchange rate channels, with exchange-rate policy determining which force dominates.

Keywords: news shocks; inflation; oil discoveries; New Keynesian model; small open economy; exchange-rate regimes (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 F41 Q32 (search for similar items in EconPapers)
Date: 2026-10
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.bis.org/publications/working-paper-138 ... -oil-discoveries.pdf Full PDF document (application/pdf)
https://www.bis.org/publications/working-paper-138 ... arge-oil-discoveries (text/html)

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:bis:biswps:1389

Access Statistics for this paper

More papers in BIS Working Papers from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Martin Fessler ().