The Relationship between Oil Prices and Inflation – the Role of Oil Dependency
(2022) NEKP01 20221Department of Economics
- Abstract
- In the last decades, due to geopolitical tensions, climate change, and technological
advancements, countries worldwide are becoming less dependent on oil. This thesis aims to
establish if decreased oil dependence weakens the impact of oil price shocks on inflation, thus
contributing to the existing literature on the oil-inflation relationship. To this end, a Structural
Vector Autoregressive (SVAR) model is estimated for each of the G-7 countries. The model
includes an exogenous dummy variable which captures the oil dependency of these economies.
Based on this dummy variable, the sample is split into periods of oil dependence and
independence, respectively. Impulse Response functions (IRFs) and Forecast Error Variance
Decompositions... (More) - In the last decades, due to geopolitical tensions, climate change, and technological
advancements, countries worldwide are becoming less dependent on oil. This thesis aims to
establish if decreased oil dependence weakens the impact of oil price shocks on inflation, thus
contributing to the existing literature on the oil-inflation relationship. To this end, a Structural
Vector Autoregressive (SVAR) model is estimated for each of the G-7 countries. The model
includes an exogenous dummy variable which captures the oil dependency of these economies.
Based on this dummy variable, the sample is split into periods of oil dependence and
independence, respectively. Impulse Response functions (IRFs) and Forecast Error Variance
Decompositions (FEVDs) are estimated in both subsamples for each country. The results
suggest that in periods of oil independency, oil price shocks induce a lower response in inflation
compared to periods in which the G-7 economies are considered oil dependent. The results are
policy relevant as they highlight one benefit of moving towards less oil dependency: the
country's economy will remain more stable as oil prices fluctuate when becoming less
dependent on oil. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9094607
- author
- Almgren, Per LU and Holmberg, Isabelle LU
- supervisor
-
- Andreas Ek LU
- organization
- course
- NEKP01 20221
- year
- 2022
- type
- H2 - Master's Degree (Two Years)
- subject
- keywords
- Inflation, Macroeconomics, Oil-price Shocks, Structural Vector Autoregression (SVAR), time series data.
- language
- English
- id
- 9094607
- date added to LUP
- 2022-10-10 11:18:37
- date last changed
- 2022-10-10 11:18:37
@misc{9094607,
abstract = {{In the last decades, due to geopolitical tensions, climate change, and technological
advancements, countries worldwide are becoming less dependent on oil. This thesis aims to
establish if decreased oil dependence weakens the impact of oil price shocks on inflation, thus
contributing to the existing literature on the oil-inflation relationship. To this end, a Structural
Vector Autoregressive (SVAR) model is estimated for each of the G-7 countries. The model
includes an exogenous dummy variable which captures the oil dependency of these economies.
Based on this dummy variable, the sample is split into periods of oil dependence and
independence, respectively. Impulse Response functions (IRFs) and Forecast Error Variance
Decompositions (FEVDs) are estimated in both subsamples for each country. The results
suggest that in periods of oil independency, oil price shocks induce a lower response in inflation
compared to periods in which the G-7 economies are considered oil dependent. The results are
policy relevant as they highlight one benefit of moving towards less oil dependency: the
country's economy will remain more stable as oil prices fluctuate when becoming less
dependent on oil.}},
author = {{Almgren, Per and Holmberg, Isabelle}},
language = {{eng}},
note = {{Student Paper}},
title = {{The Relationship between Oil Prices and Inflation – the Role of Oil Dependency}},
year = {{2022}},
}