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How Does the Oil Price Shock Affect Consumers?

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  • Gao, Liping
  • Kim, Hyeongwoo
  • Saba, Richard

Abstract

This paper evaluates the degree of the pass-through effect of the oil price shock to six CPI sub-indices in the US. We report substantially weaker pass-through effects in less energy-intensive sectors compared with those in more energy-intensive sectors. We attempt to find an explanation for this from the role of spending adjustments when there’s an unexpected change in the oil price. Using linear and nonlinear framework, we find substantial decreases in the relative price in less energy-intensive sectors, but not in energy-intensive sectors, which may be due to a substantial decrease in the demand for goods and services in those CPI sub-baskets. Our findings are consistent with those of Edelstein and Kilian (2009) in the sense that spending adjustments play an important role in price dynamics in response to unexpected changes in the oil price.

Suggested Citation

  • Gao, Liping & Kim, Hyeongwoo & Saba, Richard, 2013. "How Does the Oil Price Shock Affect Consumers?," MPRA Paper 49565, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:49565
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    References listed on IDEAS

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    1. Lutz Kilian & Logan T. Lewis, 2011. "Does the Fed Respond to Oil Price Shocks?," Economic Journal, Royal Economic Society, vol. 121(555), pages 1047-1072, September.
    2. Hyeongwoo Kim, 2013. "Generalized impulse response analysis: General or Extreme?," EconoQuantum, Revista de Economia y Finanzas, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 10(2), pages 135-141, Julio – D.
    3. Gisser, Micha & Goodwin, Thomas H, 1986. "Crude Oil and the Macroeconomy: Tests of Some Popular Notions: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 95-103, February.
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    6. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know That Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198, National Bureau of Economic Research, Inc.
    7. Cologni, Alessandro & Manera, Matteo, 2008. "Oil prices, inflation and interest rates in a structural cointegrated VAR model for the G-7 countries," Energy Economics, Elsevier, vol. 30(3), pages 856-888, May.
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    More about this item

    Keywords

    Oil Price Shocks; Pass-Through Effect; Consumer Price Sub-Index; Income Effect; Threshold Vector Autoregressive Model;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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