We study the impact of fluctuations in global oil prices on domestic inflation using an unbalanced panel of 72 advanced and developing economies over the period from 1970 to 2015. We find that a 10% increase in global oil inflation increases, on average, domestic inflation by about 0.4 percentage points on impact, with the effect vanishing after two years and being similar between advanced and developing economies. We also find that the effect is asymmetric, with positive oil price shocks having a larger effect than negative ones. The impact of oil price shocks, however, has declined over time due in large part to a more credible monetary policy and less reliance on energy imports. We further examine the transmission channels of oil price shocks on domestic inflation during the recent decades, by making use of a monthly dataset from 2000 to 2015. The results suggest that the share of transport in the CPI basket and energy subsidies are the most robust factors in explaining cross-country variations in the effects of oil price shocks during the period.
Bibliographical noteFunding Information:
We have benefited from the extensive comments by an anonymous referee. The opinions expressed herein are those of the authors and do not necessarily reflect those of the IMF, its member countries or its policy. The usual disclaimer applies and any remaining errors are the authors’ sole responsibility. This paper was supported in part through a research project on macroeconomic policy in low-income countries with the UK’s Department for International Development.
© 2018 Elsevier Ltd
All Science Journal Classification (ASJC) codes
- Economics and Econometrics