Energy Price Uncertainty and Decreasing Pass-through to Core Inflation

Ahmed Pirzada

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: This paper uses an extended version of the New Keynesian model to provide an alternate explanation for the decrease in energy price pass-through to core inflation. Results show that in a model with households' consumption of energy goods, uncertain energy prices decrease firms' responsiveness to an energy price shock. This is due to the upward pricing bias channel in firms' pricing decision. Since prices are sticky firms bias their prices upwards. The pricing bias provides cushion to firms against future cost shocks. Increase in energy price uncertainty further increases the magnitude of the bias. As a result, when a positive energy price shock hits the economy, firms require a smaller increase in their prices than they would have in absence of the pricing bias.

Keywords: Energy Prices; Uncertainty; Inflation; Monetary Policy; DSGE. (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Pages: 44 pages.
Date: 2017-04-13, Revised 2017-05-30
New Economics Papers: this item is included in nep-dge, nep-ene and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:17/681

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