Oil Price Shocks: Firms' Expectations and Borrowing Decisions

Abstract

This paper examines the high-frequency impact of oil price shocks on firms' inflation expectations and subsequent credit demand. Exploiting city-level variation in retail fuel pump prices within a 5-day window, we identify the immediate effect on firms' expectations. Our findings indicate a pass-through of about 30%: a 1 percent increase in local oil prices leads to a 0.3 percentage point rise in firms' one-year-ahead inflation expectations. Building on this, we analyze the consequent shifts in corporate credit behavior following oil supply shocks: a 1 percent increase in fuel prices leads to a 0.5 percent rise in short-term borrowing and a 0.5 percent decline in long-term borrowing, as higher operating costs increase working-capital needs while a weaker macroeconomic outlook reduces planned investment. The net effect is a maturity reallocation rather than a change in total borrowing. The results document a dual channel through which oil shocks shape firms' beliefs and create divergent shifts in short-versus long-term corporate credit demand.

Keywords: Fuel Shocks, Inflation, Expectations, Credit

JEL Classification: E12, E24, E52