Do All Oil Price Shocks Have The Same Impact? Evidence From The Euro Area

• Considerable difference between the impact of oil price shocks in uncertain and tranquil periods
• Larger oil price shocks can have a disproportionately bigger effect on Harmonised Index of Consumer Prices (HICP) than smaller shocks
• In times of uncertainty, output, economic sentiment and stock markets decline more rapidly in response to oil price shocks

The Central Bank has published a new Economic Letter (PDF 815.12KB) by Anastasios Evgenidis providing an overview on the differing impacts of oil price shocks in periods of uncertainty, such as the financial crisis.

The author examines whether positive and negative, large and small oil price shocks affect inflation differently.   He asks if all oil price shocks have the same impact and gathers evidence from the Euro area.

Mr Evgenidis finds that in response to oil price shocks, output, economic sentiment and stock markets decline much more rapidly when there is uncertainty.  In contrast, inflation and interest rates increase more strongly.

The author states larger oil price shocks tend to have a disproportionately bigger effect on HICP than smaller shocks, while negative oil price shocks have a bigger effect on HICP compared with positive shocks.

The findings in the letter also suggest policymakers need to consider the size and direction of an oil price shock as well as the economic situation in which an oil price occurs.

The views expressed in this paper are those of the author only and do not necessarily reflect the views of the Central Bank of Ireland.

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More Economic Letters can be found here