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.
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