Effects Of Energy Price Shocks Research Articles

Energy price shocks, conflict inflation, and income distribution in a three-sector model

The paper presents a model of conflict inflation to investigate the distributional effects of energy price shocks. We argue that periods of high inflation are always periods of significant redistribution of income. We analyse how such redistribution occurs along two dimensions: between workers and firms and between sectors of the economy. To study the distributional outcomes of the recent inflationary episode, we build a three-sector model comprising a domestic energy sector which provides inputs for a goods and a services sector. The model is calibrated to US sectoral data with the Method of Simulated Moments. While energy prices are set internationally, non-energy prices and nominal wages are set by firms and workers, giving rise to conflicting claims over the distribution of income. We consider three shocks that trigger inflationary distributional conflict: an energy price shock combined with demand and supply shocks to the goods sector. We find that the recent inflationary episode constitutes a price-wage rather than a wage-price spiral. The combined shocks induce non-energy firms to raise prices, which undermines real wages, and redistributes income towards firms. The sectoral demand shift towards goods in combination with pandemic-related supply bottlenecks further raises mark-ups, accelerating inflation and leading to divergence in sectoral profit margins. We compare three anti-inflationary policies: redistributing windfall profits to workers, nominal wage restraint, and aggregate demand contraction through monetary or fiscal policy. The redistribution of profits via a windfall tax is most effective in reducing inflation without reinforcing reductions in employment and labour shares.

A broader perspective on the inflationary effects of energy price shocks

Consumers purchase energy in many forms. Sometimes energy goods are consumed directly, for instance, in the form of gasoline used to operate a vehicle, electricity to light a home, or natural gas to heat a home. At other times, the cost of energy is embodied in the prices of goods and services that consumers buy, say when purchasing an airline ticket or when buying online garden furniture made from plastic to be delivered by mail. Previous research has focused on quantifying the pass-through of the price of crude oil or the price of motor gasoline to U.S. inflation. Neither approach accounts for the fact that percent changes in refined product prices need not be proportionate to the percent change in the price of oil, that not all energy is derived from oil, and that the correlation of price shocks across energy markets is far from one. This paper develops a vector autoregressive model that quantifies the joint impact of shocks to several energy prices on headline and core CPI inflation. Our analysis confirms that focusing on gasoline price shocks alone will underestimate the inflationary pressures emanating from the energy sector, but not enough to overturn the conclusion that much of the observed increase in headline inflation in 2021 and 2022 reflected non-energy price shocks.

The effect of energy price shocks on commodity currencies during the war in Ukraine

The ongoing geopolitical crisis that has emerged due to the war in Ukraine has created economic winners and losers. We adopt the DS-ARDL and Cross-Quantilogram approaches to examine the effect of higher energy prices on commodity currencies during this war. Our findings based on 4-h time frame data between January and November 2022 indicate a significant positive effect of energy price hikes on the value of the Australian dollar relative to the Japanese yen, Euro, and British pound. The comparison of the effects of gas and oil price hikes on the exchange rates reveals that these exchange rate movements have been mostly due to gas price shocks. Considering the effects of this war on the international economy, the most critical policy implications to improve the financial health of the economies are provided.

Effects of Energy Prices Shocks on Global Inflation: A Panel Structural VAR Approach

Global supply shock suffered massive disruption because of COVID-19 in the last few years. Such a shock is accompanied by an energy price surge caused by the war in Ukraine. We study the effects of energy price shocks (common, idiosyncratic) on inflation due to energy price issues. We set up a panel structural VAR (PSVAR) model to study whether energy price shocks exhibit long memory properties (persistence) having permanent (long-run) effects on global inflation. The model is modelled under Cholesky and Blanchard-Quah restrictions. We calculate medians, averages, and interquartile impulse response functions with confidence interval quantiles following bootstrapping procedure. We see energy shock impact on headline inflation last 2.5 years (slow mean-reversion) reaching pre-crisis level.

Energy shocks and bank performance in the advanced economies

This paper investigates the effects of energy price shocks on the performance of 62 major banks in the G7 advanced economies from 2001 to 2020. Employing numerous empirical techniques, including fixed effects, random effects, panel fully modified least squares, panel dynamic least squares, and GMM, the findings show that energy price shocks have a significant negative impact on banking sector performance, in terms of both return on assets and return on equity. This result holds true even after controlling for a range of key macro and financial variables, suggesting energy price shocks can have a direct impact on banking performance. Given the importance of banks for both financial stability and wider economic performance, and given the recent surge in energy prices, these findings have important implications for policymakers, regulators, as well as banking sector stakeholders.

A Broader Perspective on the Inflationary Effects of Energy Price Shocks

A Broader Perspective on the Inflationary Effects of Energy Price Shocks

An Empirical Analysis of the Effects of Energy Price Shocks for Sustainable Energy on the Macro-Economy of South Asian Countries

Energy prices (EPs) play an imperative role in South Asian Country (SAC) Gross Domestic Product (GDP). This research empirically examines the influence of sustainable energy price shocks (EPSs) on macroeconomic indicators. The study is to forecast the impact of EPS on macroeconomic indicators from 1980 to 2020. The analysis is carried out by employing the Vector Auto-Regression (VAR) approach. Impulse Response Functions (IRFs) results indicate that EPS decreases Gross Domestic Product (GDP). They exist in the short run and the long run. This research study’s overall findings suggest that high EPSs have a negative impact on GDP. The study implies that policymakers should develop, adopt, and initiate some imperatives to control the unanticipated volatility and movements in EP. The study highlights that policy should be designed to prevent fluctuations in sustainable EP and plan conservative energy policies that motivate discovering alternative energy sources to meet increasing energy demand and improve economic growth.

A Broader Perspective on the Inflationary Effects of Energy Price Shocks

A Broader Perspective on the Inflationary Effects of Energy Price Shocks

ENERGY IN A MODEL OF FIRM ENTRY

Nine out of the last ten recessions in the United States have been preceded by an increase in the price of oil as noted by Hamilton [Palgrave Dictionary of Economics]. Given the small share of energy in gross domestic product this phenomenon is difficult to explain using standard models. In this paper, I show that firm entry can be an important transmission and amplifying channel for energy price shocks. The results from the baseline dynamic stochastic general equilibrium (DSGE) model predict a drop in output that is two times the impact in a model without entry. The model also predicts an increase in energy prices would lead to a decline in real wages, investment, consumption, and return on investment. Additionally, using US firm level data, I demonstrate that a rise in energy prices has a negative impact on firm entry as predicted by the DSGE model. This lends further support toward endogenizing firm entry when analyzing the effects of energy price shocks.

Time varying macroeconomic effects of energy price shocks: A new measure for China

In this paper, we examine the effects of world energy price shocks on China's macroeconomy over the past two decades. We begin by showing that the use of oil prices as a proxy for more general energy price dynamics is not appropriate for the case of China. Having established this fact, we propose a new energy price index which accurately reflects the structure of China's energy expenditure shares, and intertemporal fluctuations in international energy prices. We then employ a sufficiently rich set of time varying VARs, identified through a new set of agnostic sign restrictions, to estimate the effects of energy price shocks on China's macroeconomy. Our main result is that positive energy price shocks generate statistically significant reductions in real GDP growth and increases in inflation. Interestingly, both the sets of responses have consistently declined over the sample period. Next, the interest rate responses are found to be consistently positive over the sample period. Given the aforementioned stagflation result, this suggests that the PBOC is more focused on inflation stabilization as compared to facilitating output growth. All presented results are shown to be robust under both official national data and those developed by Chang et al. (2015), thus strengthening our conclusion that energy price shocks have significant time varying effects on China's macroeconomy.

MACROECONOMIC EFFECTS OF ENERGY PRICE SHOCKS ON THE BUSINESS CYCLE

This paper proposes a framework of endogenous energy production with convex costs to investigate the general equilibrium effects of energy price shocks on the business cycle. This framework explicitly models the consumption of durables and nondurables and implements a high complementarity between energy and the usage of durables and capital. The model predicts energy price elasticities of various consumption variables that fall within reasonable agreement with empirical estimates. Convex costs in energy production produce energy price and energy supply dynamics that tallies well with empirical behavior. Our analysis confirms in a theoretical setting recent observations that not all energy price shocks are the same. They can be distinct in terms of energy price dynamics and impact on the business cycle, as well as energy price elasticities of various macro variables that can be useful indicators for their underlying causes.

Energy price shocks, monetary policy and China's economic fluctuations

This paper develops a New Keynesian dynamic stochastic general equilibrium model with energy factors to study various channels through which China's economic fluctuations are linked to energy price shocks and to search for the optimal monetary policy to cope with energy price shocks. We conclude that there are channels through which changes in energy prices will have the following cause–effect relationships. First, a rise in energy price as a negative technology shock will raise the costs of providing capital services per unit of capital, thereby reducing output. Second, a rising energy price distorts the intertemporal choices of households and firms, creating downward pressure on the expected future return on capital. Third, an energy price shock places upward pressure on the marginal costs associated with an increase in inflation. Numerical simulation results show that a positive energy price shock has a positive effect on energy technology improvements. In addition, the effects of energy price shocks can be mitigated by nominal rigidities, and interest rate rules will determine the magnitude of those effects. Using the efficient frontier method, we also show that optimal monetary policy in China should help control energy price volatility.

The Economic Effects of Energy Price Shocks

The Economic Effects of Energy Price Shocks

How sensitive are consumer expenditures to retail energy prices?

There is growing evidence that the primary effect of energy price shocks on the U.S. economy involves a reduction in consumer spending. We quantify the direct effect on real consumption of unanticipated changes in discretionary income, shifts in precautionary savings, and changes in the operating cost of energy-using durables. The possibility of asymmetries in the response of real consumption to energy price shocks is also considered. We demonstrate that linear models are consistent with the symmetric behavior of real consumption in 1979 (when energy prices increased sharply) and in 1986 (when they fell sharply). It is shown that historically energy price shocks have been an important factor in explaining U.S. real consumption growth, but by no means the dominant factor.

Pitfalls in Estimating Asymmetric Effects of Energy Price Shocks

A common view in the literature is that the effect of energy price shocks on macroeconomic aggregates is asymmetric in energy price increases and decreases. We show that widely used asymmetric vector autoregressive models of the transmission of energy price shocks are misspecified, resulting in inconsistent parameter estimates, and that the implied impulse responses have been routinely computed incorrectly. As a result, the quantitative importance of unanticipated energy price increases for the U.S. economy has been exaggerated. In response to this problem, we develop alternative regression models and methods of computing responses to energy price shocks that yield consistent estimates regardless of the degree of asymmetry. We also introduce improved tests of the null hypothesis of symmetry in the responses to energy price increases and decreases. An empirical study reveals little evidence against the null hypothesis of symmetry in the responses to energy price shocks. Our analysis also has direct implications for the theoretical literature on the transmission of energy price shocks and for the debate about policy responses to energy price shocks.

Pitfalls in Estimating Asymmetric Effects of Energy Price Shocks

A common view in the literature is that the effect of energy price shocks on macroeconomic aggregates is asymmetric in energy price increases and decreases. We show that widely used asymmetric vector autoregressive models of the transmission of energy price shocks are misspecified, resulting in inconsistent parameter estimates, and that the implied impulse responses have been routinely computed incorrectly. As a result, the quantitative importance of unanticipated energy price increases for the U.S. economy has been exaggerated. In response to this problem, we develop alternative regression models and methods of computing responses to energy price shocks that yield consistent estimates regardless of the degree of asymmetry. We also introduce improved tests of the null hypothesis of symmetry in the responses to energy price increases and decreases. An empirical study reveals little evidence against the null hypothesis of symmetry in the responses to energy price shocks. Our analysis also has direct implications for the theoretical literature on the transmission of energy price shocks and for the debate about policy responses to energy price shocks.

The Economic Effects of Energy Price Shocks

Large fluctuations in energy prices have been a distinguishing characteristic of the U.S. economy since the 1970s. Turmoil in the Middle East, rising energy prices in the United States, and evidence of global warming recently have reignited interest in the link between energy prices and economic performance. This paper addresses a number of the key issues in this debate: What are energy price shocks and where do they come from? How responsive is energy demand to changes in energy prices? How do consumer's expenditure patterns evolve in response to energy price shocks? How do energy price shocks affect U.S. real output, inflation, and stock prices? Why do energy price increases seem to cause recessions but energy price decreases do not seem to cause expansions? Why has there been a surge in the price of oil in recent years? Why has this new energy price shock not caused a recession so far? Have the effects of energy price shocks waned since the 1980s and, if so, why? As the paper demonstrates, it is critical to account for the endogeneity of energy prices and to differentiate between the effects of demand and supply shocks in energy markets when answering these questions.

Nominal Wage Flexibility and Economic Performance: Evidence and Implications Across Industrial Countries

By considering the theoretical connection between labour and product markets, the paper evaluates the economic relationship of these markets within the contractual wage rigidity New Keynesian explanation of business cycles. The empirical analysis focuses on the short-run cyclical behaviour of real output, prices and wages for 19 industrial countries. Time-series and cross-sectional regressions are estimated. Cross-sectional cyclical correlations in the labour and goods markets are also evaluated across countries. Consistent with the theoretical predictions, aggregate uncertainty is an important factor in increasing the flexibility of the nominal wage in response to aggregate demand shocks. Wage flexibility accelerates price inflation and moderates the response of real output growth to aggregate demand shocks. Wage flexibility does not appear to be an important factor in differentiating the real and inflationary effects of energy price shocks across countries. Finally, aggregate uncertainty increases the responsiveness of output and price to productivity shocks.

Economic Growth, Energy Prices and Technological Innovation

Energy economists are repeatedly asked to analyze the short run and long run macroeconomic effects of energy price shocks. The authors examine the effect of energy prices in a dynamic model of economic growth as a function of capital, labor, energy prices, and technological innovation. Their approach extends earlier studies in two ways. First, they depart from the standard approach of modeling strictly in either levels or differences by using an error correction model. The advantage of this approach is that both short run and long run information is used in the model. Second, they construct a measure of technological innovation with patent filings. Typically, deterministic trends have been used to capture technological growth. The increase in energy efficiency since 1974 had been due to energy conservation and improvements in energy intensive capital stock and production processes. They authors try to simultaneously use energy prices and technological innovation in a model of macroeconomic growth. If energy price symmetry is imposed, they conclude that the short run energy price effects are approximately half the long run energy price effects. When the restriction is relaxed short run price symmetry does not hold. In particular, short run price increases are associated with economicmore » downturns while short run price declines have no significant impact on economic activity. Also, the results show that technological innovation, measured through the stock of patents, contributes both directly to economic growth and indirectly through improvements in the economy`s capital stock.« less

On the macroeconomic effects of energy price shocks

Energy price shocks are widely believed to have severe macroeconomic effects, although this conclusion is far from unanimous in the economics literature. An analysis of disaggregated industry data for four countries after each energy price shock in the 1970s reinforces doubts about the role of energy in these recessions. There was no similarity in the impact on output and employment across industries between the two recessions, and no consistent relationship between industry activity and energy intensity by industry. In addition, there is no evidence to support either the wage rigidity hypothesis or the capital obsolescence hypothesis as an explanation of the effect of energy price shocks on macroeconomic behavior.