How Does the Oil Price Shock Affect Consumers?

Gao, Liping and Kim, Hyeongwoo and Saba, Richard (2013): How Does the Oil Price Shock Affect Consumers?

Abstract

This paper evaluates the degree of the pass-through effect of the oil price shock to six CPI sub-indices in the US. We report substantially weaker pass-through effects in less energy-intensive sectors compared with those in more energy-intensive sectors. We attempt to find an explanation for this from the role of spending adjustments when there’s an unexpected change in the oil price. Using linear and nonlinear framework, we find substantial decreases in the relative price in less energy-intensive sectors, but not in energy-intensive sectors, which may be due to a substantial decrease in the demand for goods and services in those CPI sub-baskets. Our findings are consistent with those of Edelstein and Kilian (2009) in the sense that spending adjustments play an important role in price dynamics in response to unexpected changes in the oil price.

• Item Type: MPRA Paper
• Language: English
• Keywords: Oil Price Shocks; Pass-Through Effect; Consumer Price Sub-Index; Income Effect; Threshold Vector Autoregressive Model
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q43 - Energy and the Macroeconomy

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