Cross-country study of the linkages between COVID-19, oil prices, and inflation in the G7 countries

Abstract

We examine how inflation in the G7 countries is influenced by three distinct oil price shocks. Our methodology, following Killian (2009), employs a two-stage approach that uses Cholesky decomposition and cumulative impulse response functions to evaluate the impact of oil shocks on G7 inflation, with a focus on supply, aggregate demand, and oil-specific demand shocks. Inflation in the G7 is significantly impacted by aggregate demand and oil-specific demand shocks during the pandemic, whereas shocks to the supply of oil have a limited effect. Our findings may have significant implications for investment diversification and hedging, as well as for policymakers.