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

65 Pages Posted: 9 Nov 2005

See all articles by Matteo Manera

Matteo Manera

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS); Fondazione Eni Enrico Mattei (FEEM), Milan, Italy

Alessandro Cologni

Fondazione Eni Enrico Mattei (FEEM)

Date Written: September 2005

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

JEL Classification: E31, E32, E52, Q41

Suggested Citation

Manera, Matteo and Cologni, Alessandro, Oil Prices, Inflation and Interest Rates in a Structural Cointegrated VAR Model for the G-7 Countries (September 2005). FEEM Working Paper No. 101.2005. Available at SSRN: https://ssrn.com/abstract=843505 or http://dx.doi.org/10.2139/ssrn.843505

Matteo Manera (Contact Author)

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS) ( email )

Via Bicocca degli Arcimboldi, 8
Milan, 20126
Italy
+39 02 6448 5819 (Phone)
+39 02 6448 5878 (Fax)

HOME PAGE: http://www.matteomanera.it

Fondazione Eni Enrico Mattei (FEEM), Milan, Italy ( email )

Corso Magenta, 63
Milan, 20123
Italy
+39 02 520 36944 (Phone)

HOME PAGE: http://www.feem.it

Alessandro Cologni

Fondazione Eni Enrico Mattei (FEEM) ( email )

C.so Magenta 63
Milano, 20123
Italy

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