Oil Prices, Monetary Policy and Inflation Surges / Luca Gagliardone, Mark Gertler.

Format:

Book

Author/Creator:

Gagliardone, Luca.

Contributor:

National Bureau of Economic Research.

Gertler, Mark.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31263.

NBER working paper series no. w31263

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

We develop a simple quantitative New Keynesian model aimed at accounting for the recent sudden and persistent rise in inflation, with emphasis on the role of oil shocks and accommodative monetary policy. The model features oil as a complementary good for households and as a complementary input for firms. It also allows for unemployment and real wage rigidity. We estimate the key parameters by matching model impulse responses to those from identified money and oil shocks in a structural VAR. We then show that our model does a good job of explaining unemployment and inflation since 2010, including the recent inflation surge that began in mid 2021. We show that mainly accounting for this surge was a combination oil price shocks and "easy" monetary policy, even after allowing for demand shocks and shocks to labor market tightness. Important for the quantitative impact of the oil price shock is a low elasticity of substitution between oil and labor, which we estimate to be the case.

Notes:

Print version record

May 2023.