Oil Price Pass-Through in the EMU. An empirical study of the role of energy for oil price pass-through to inflation and inflation differentials

Abstract: This paper examines the relationship between oil prices and its pass-through to inflation and inflation differentials in the European Monetary Union from the first quarter of 1999 to the last quarter of 2021. By using local projections to derive impulse response functions of an oil price shock, the pass-through to the inflation level is examined focusing on the role of energy-related transmission channels. The same transmission channels are examined for pass-through of oil price inflation to inflation differentials using a Pooled OLS regression. The aim of this paper is to contribute to earlier research by giving an updated view on how exposed the European Monetary Union is to changes in oil prices. Our estimates show that the EMU is not sensitive to oil price shocks pertaining to the inflation level. As the examined transmission channels show small effects of pass-through to the inflation level, where Energy Dependency accounts for the largest effect. Moreover, the findings from examining inflation differentials show a negative linkage between oil price inflation and inflation differentials. Yet, the Transport Share of HICP is found causing a small, yet amplifying effect on inflation differentials. The linkage of the other transmission channels cannot be established for inflation differentials.