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Time Variation in the Inflation Passthrough of Energy Prices

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Abstract:

From Bayesian estimates of a vector autoregression that allows for both coefficient drift and stochastic volatility, we obtain the following three results. First, beginning in approximately 1975, the responsiveness of core inflation to changes in energy prices in the United States fell rapidly and remains muted. Second, this decline in the passthrough of energy inflation to core prices has been sustained through a recent period of markedly higher volatility of shocks to energy inflation. Finally, reduced energy inflation passthrough has persisted in the face of monetary policy that became less responsive to energy inflation starting around 1985.

Keywords: C11; E31; E52; core inflation; oil price shocks; time-varying parameters

Document Type: Research Article

DOI: http://dx.doi.org/10.1111/j.1538-4616.2010.00347.x

Affiliations: 1: Todd E. Clark is a Vice President and Economist at the Federal Reserve Bank of Kansas City (:  )., Email: todd.e.clark@kc.frb.org 2: Stephen J. Terry is a Ph.D. student in economics at Stanford University (:  )., Email: sterry@stanford.edu

Publication date: October 1, 2010

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