Down the Non-Linear Road from Oil to Consumer Energy Prices: Not Much Asymmetry Along the Way

58 Pages Posted: 1 Sep 2010

Date Written: March 22, 2010

Abstract

In the past decade changes in oil prices have played a significant role in shaping inflation dynamics in the US and in the euro area, largely through their direct effect on fuels prices, reviving the controversy over whether the prices of petroleum products respond more promptly to positive than to negative oil price shocks. This paper provides fresh evidence on this issue for the US, the euro area and the four largest euro area countries (Germany, France, Italy and Spain), both for petrol and diesel prices. Inference is based on the dynamic response of downstream prices to upstream shocks, rather than on tests on the regression slopes as in the majority of existing studies, taking into account the non-linearity of the impulse response function in models with asymmetric adjustment, so far ignored in this literature. The empirical analysis shows that fuels prices respond very promptly to oil price shocks, with some heterogeneity across countries, and that no systematic evidence of asymmetries emerges. This result is robust across periods of high and low oil price volatility and holds both for standard and large shocks.

Keywords: Energy, Oil Prices, Asymmetry, Inflation

JEL Classification: C52, Q43, E31

Suggested Citation

Venditti, Fabrizio, Down the Non-Linear Road from Oil to Consumer Energy Prices: Not Much Asymmetry Along the Way (March 22, 2010). Bank of Italy Temi di Discussione (Working Paper) No. 751, Available at SSRN: https://ssrn.com/abstract=1670093 or http://dx.doi.org/10.2139/ssrn.1670093

Fabrizio Venditti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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