Oil Prices, Inflation and Interest Rates in a Structural Cointegrated VAR Model for the G-7 Countries

Matteo Manera () and Alessandro Cologni
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Alessandro Cologni: Fondazione Eni Enrico Mattei

No 2005.101, Working Papers from Fondazione Eni Enrico Mattei

Abstract: Sharp increases in the price of oil are generally seen as a major contributor to business cycle asymmetries. Moreover, the very recent highs registered in the world oil market are causing concern about possible slowdowns in the economic performance of the most developed countries. While several authors have considered the direct channels of transmission of energy price increases, other authors have argued that the economic downturns arose from the monetary policy response to the inflation presumably caused by oil price increases. In this paper a structural cointegrated VAR model has been considered for the G-7 countries in order to study the direct effects of oil price shocks on output and prices and the reaction of monetary variables to external shocks. Empirical analysis shows that, for most of the countries considered, there seems to be an impact of unexpected oil price shocks on interest rates, suggesting a contractionary monetary policy response directed to fight inflation. In turn, increases in interest rates are transmitted to real economy by reducing output growth and the inflation rate.

Keywords: Oil price shocks; Monetary policy response; Structural VAR models (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 Q41 (search for similar items in EconPapers)
Date: 2005-09
New Economics Papers: this item is included in nep-ene, nep-ets, nep-mac and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Oil prices, inflation and interest rates in a structural cointegrated VAR model for the G-7 countries (2008)
Working Paper: Oil Prices, Inflation and Interest Rates in a Structural Cointegrated VAR Model for the G-7 Countries (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2005.101

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