Are Oil Shocks Inflationary? Asymmetric and Nonlinear Specifications versus Changes in Regime*

This paper estimates the effects of oil price changes on U.S. inflation in a Phillips curve framework, allowing for some of the asymmetries, nonlinearities, and structural breaks that have been found in the literature on the real effects of oil price shocks. It finds that since around 1980, oil price changes seem to affect inflation only through their direct share in a price index, with little or no pass-through into core measures, while before 1980 oil shocks contributed substantially to core inflation. This structural-break characterization appears robust to a variety of respecifications, and to fit the data better than asymmetric and nonlinear oil price alternatives. Preliminary evidence suggests that a change in the reaction of monetary policy to oil shocks is part of the explanation. * The views expressed are those of the author and do not necessarily represent those of the Federal Reserve Board. I thank Bill English, Chris Hanes, Bill Nelson, and Robert Rich for helpful comments and suggestions.