Energy price shocks, exchange rates and inflation nexus

Abstract

Energy price shocks, exchange rates and inflation have challenged macroeconomics stability in the recent past, during the Covid-19 crisis and the following high growth recovery post Covid. The joint relations among these three main macro-variables: exchange rate, consumer price and oil prices is modeled in this paper, in the periods of pre-Covid and of supply recovery after the Covid-19 lockdown. The estimation of an empirical VARX model on monthly data from Jan 2010 to Dec 2021 for the main 15 countries of the G20 shows asymmetric effects, offers a detailed contagion analysis, conducted with the methodology a la Pesaran and Pick (2007) to identify periods of high volatility, and presents a spillover analysis a la Diebold and Yılmaz (2014), used to measure the connectedness of the three main variables.The main innovative contributions are: i) the analysis of the country specific oil portfolio; ii) the general impulse response spillover, to ascertain the intensity and direction of volatility connectedness; iii) the disentangling of the effects on the exchange rate and price stability stemming from oil prices shocks. The empirical results show that: i) significant effects differences depend on the specific oil price considered for each country; ii) oil price changes impacts depend on the direction and period of the shock; iii) asymmetric contagion effects are relevant only for some oil importing countries and for exchange rate and inflation. Finally, based on the spillover connectedness, some policy implications are discussed.