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What Do Energy Prices Tell Us About UK Inflation?
Author(s) -
Rafiq Sohrab
Publication year - 2014
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12076
Subject(s) - economics , oil price , inflation (cosmology) , volatility (finance) , vector autoregression , stochastic volatility , econometrics , monetary economics , physics , theoretical physics
We investigate the effect of oil price shocks on UK inflation using a time‐varying vector autoregression with stochastic volatility. The estimates show that the oil price–inflation pass‐through declined from the early 1980s until the mid/late 1990s. Post‐2003, however, the importance of oil price shocks for UK inflation rose significantly. The rise in the pass‐through coincided with a significant increase in the size of oil price shocks. This paper shows that allowing for time variation in the stochastic volatilities better captures time variation between oil prices and UK inflation.