The non-linear response of US state-level tradable and non-tradable inflation to oil shocks: The role of oil-dependence |
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Institution: | 1. Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford CM1 1SQ, United Kingdom;2. Department of Economics, Northeastern Illinois University, 5500 N St Louis Ave, BBH 344 G, Chicago, IL 60625, USA;3. Department of Economics, University of Pretoria, Pretoria 0002, South Africa;4. Institutes of Science and Development, Chinese Academy of Sciences, Beijing 100190, China;5. School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing 100049, China |
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Abstract: | This paper investigates the effects of oil supply, oil-specific consumption demand, oil inventory demand shocks, and global economic activity shocks on state-level tradable and non-tradable inflation in the US. We use oil shock data following the work of Baumeister and Hamilton (2019) and estimate both linear and non-linear impulse responses using a lag-augmented local projections model in a panel context. Our results from a linear model show that both supply and demand-side oil shocks have a statistically significant impact on both types of inflation. While supply, global economic activity, and demand shocks have a greater impact on tradable inflation, non-tradable inflation responds more strongly to inventory shocks. Further, the non-linear model results provide evidence of heterogeneity in the magnitude and persistence of impact between high- and low-oil dependence regimes. Non-tradable inflation is more sensitive to nearly all components of oil price shocks in the high-oil dependence regime. |
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Keywords: | Phillips curve Structural oil shocks State-level inflation Local projection method |
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