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Working Papers

Oil Prices, Monetary Policy and Inflation Surges, with M. Gertler

| January 2024 |


We develop a simple quantitative New Keynesian model aimed at accounting for the recent sudden and persistent rise in inflation. The model features oil as a complementary good for households and as a complementary input for firms, along with real wage rigidity and an explicit role for labor market tightness. We estimate the key parameters by matching model impulse responses to those from identified oil and monetary policy shocks in a structural VAR. We then show that our model does a good job explaining the recent surge, despite treating inflation as an untargeted variable in the historical decomposition. We find that a combination of oil price shocks and “accommodative” monetary policy alone can account for most of the surge, even after allowing for shocks to aggregate demand and labor market tightness. Essential for the quantitative impact of the oil price shock is a low elasticity of substitution between oil and labor, which we estimate to be the case.


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