Asymmetric impact of oil price shocks on inflation: Evidence from quantile-on-quantile regression

Abstract

In this paper, we explore the asymmetric impact of different oil price shocks on inflation after decomposing the shocks into supply shocks, demand shocks, and risk shocks. Using the quantile-on-quantile regression (QQR) approach, we reveal that when inflation is positive, oil supply shocks have a negative impact on inflation, and demand shocks affect it asymmetrically. Positive demand shocks have a positive effect on inflation, while negative demand shocks affect inflation negatively. In a deflationary environment, positive supply shocks and negative demand shocks do not have a significant impact on inflation, while negative supply shocks and positive demand shocks are conducive to alleviating deflation. The risk shocks affect inflation insignificantly in most of the periods. Only when the risk shocks are dramatically high, they will negatively affect inflation which is in a positive situation. However, the risk shocks no longer affect inflation significantly when inflation is also extremely high. Our conclusions are robust after being compared with the results of the quantile regression approach. We finally explore the time-varying characteristic of impact, finding that the influence of shocks is relatively higher during the major supply, demand, and risk shock events than in other periods.