Essays in empirical macroeconomics

Abstract

This thesis is a collection of three self contained empirical macroeconomic papers on inflation. The links between inflation and peripheral themes such as oil price shocks and its tradeoff with output are investigated. Chapter 2 studies the impact of oil shocks on U.S. inflation expectations from the Michigan Survey and how this in turn transmits into actual inflation. The results suggest oil shocks impact both inflation expectations and inflation. Counterfactual analysis suggest inflation expectations play a non-trivial role in transmission of oil shocks. Chapter 3 presents evidence on why inflation pass-through from oil shocks in the 21st century relative to the 1970s has dampened. First, results suggest global business cycle demand driven oil shocks are not inflationary. Second, there has been a reduction in inflation pass-through from oil supply and speculative oil demand shocks. Movements in oil inventories and production suggest oil supply and speculative oil demand shocks in the 1970s were different. Oil market participants expect higher oil prices to persist into the future. The analysis highlights the importance of modelling inventories as a means of capturing expectations in the oil market. Chapter 4 proposes quantifying the evolution of the U.S. output-inflation tradeoff using a Time-Varying Parameter Structural VAR. This methodology circumvents issues with existing methods which tend to be either reduced form in nature or rely on more ad hoc assumptions regarding sample split dates and both trend output and trend inflation. Working through U.S. data since the 1970s reveals only a slight change in the tradeoff from around 1.70 to 1.75 percentage points of real output growth per percentage point increase in trend inflation. This contrasts with claims that the U.S. Phillips Curve has flattened dramatically. JEL Classification: C11, C32, C54, E31, Q43.