The Impact of Oil Price Changes Infaction

THE IMPACT OF OIL PRICE CHANGES
ON SPANISH AND EURO AREA

CONSUMER PRICE INFLATION
Documentos Ocasionales
N. 0904
Luis J. lvarez, Samuel Hurtado,
Isabel Snchez and Carlos Thomas
2009
THE IMPACT OF OIL PRICE CHANGES ON SPANISH AND EURO AREA
CONSUMER PRICE INFLATION
THE IMPACT OF OIL PRICE CHANGES ON SPANISH AND
EURO AREA CONSUMER PRICE INFLATION
(*)
Luis J. lvarez
(**)
, Samuel Hurtado, Isabel Snchez
and Carlos Thomas
BANCO DE ESPAA
(*) We are grateful to participants at a Workshop of Eurosystem and Latin American Central Banks and at a Banco
de Espaa seminar, particularly ngel Estrada, Jos Manuel Gonzlez, Mario Izquierdo, Eva Ortega and Juan
Pealosa for helpful comments and suggestions.
(**) Corresponding author: ljalv@bde.es.
Documentos Ocasionales. N. 0904
2009
The Occasional Paper Series seeks to disseminate work conducted at the Banco de Espaa, in the
performance of its functions, that may be of general interest.
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acknowledged.
BANCO DE ESPAA, Madrid, 2009
ISSN: 1696-2222 (print)
ISSN: 1696-2230 (on line)
Depsito legal: M. 42145-2009
Unidad de Publicaciones, Banco de Espaa
Abstract
This paper assesses the impact of oil price changes on Spanish and euro area consumer
price ination. We nd, consistently with recent international evidence, that the inationary
effect of oil price changes is limited, even though crude oil price uctuations are a major
driver of ination variability. The impact on Spanish ination is found to be somewhat higher
than in the euro area. Direct effects are increasing over time, reecting the higher spending
of households on rened oil products, whereas indirect ones, dened in broad terms, are
losing importance.
Keywords: oil prices, consumer price ination, Spanish and Euro area ination, DSGE
models.
JEL classication: E20, E31, E37.
BANCO DE ESPAA 9 DOCUMENTO OCASIONAL N. 0904
1 IntroductIon
Shaip luclualions in lho piico of oil in ioconl yoais havo iokinoloo lho inloiosl in lho nominal ano
ioal impacls of oil piico shocks. 1ho iolovanco of oil as a souico of maciooconomic luclualions was
oslaLlishoo as convonlional wisoom afloi lho oil shocks of lho 1070s, whon inlalion ioachoo lwo
oigils in inousliializoo oconomios ano closo lo 2/ in Spain.
Howovoi, moio ioconl oil piico shocks soom lo havo hao a limiloo impacl on piicos ano ioal
aclivily. In facl, lhoio is a giowing Looy of ovioonco oocumonling lhis loss of iolovanco. 1hus,
Hookoi (2002) founo lhal oil piico changos oo nol havo a signilcanl impacl on US inlalion moasuios
lhal oxcluoo onoigy piooucls. LoLlanc ano Chinn (2004) lno a mooosl iolo of oil piico shocks on
hoaolino CII inlalion foi lho main gloLal oconomios. Do Giogoiio ol al. (2007) oocumonl a
sizaLlo ioouclion in lho pass lhiough of oil piico changos lo consumoi piicos, foi a samplo of 84
inousliializoo ano omoiging counliios. Llanchaio ano Gal (2008) consiooi G-7 counliios oxcluoing
Canaoa ano concluoo lhal lho inlalionaiy impacl of oil piico shocks is consiooiaLly lowoi fiom mio
1080s onwaios. Nakov ano Ioscaloii (2007a) oslimalo a DSGL moool wilh an oil piooucing socloi
ano lno lhal lho iooucoo oil shaio ano lho smalloi sizo of oil piico shocks aio nol lho majoi oiivois
of lho moooialion in US inlalion vaiiaLilily. Killian (2008) shows lhal lho avoiago conliiLulion of
an oxogonous oil piico shock on inlalion in G7 counliios is quilo small ano lhal of lho 2002-2008
shock is nogligiLlo. Moioovoi, iosponsos of lho GDI oolaloi aio moio muloo ano loss signilcanl
lhan lho coiiosponoing iosponsos of CII inlalion, suggosling a voiy limiloo inoiiocl impacl of oil
piico shocks.
1hoio aio sovoial ioasons lhal may holp oxplain lho lowoi inlalionaiy impacl of oil piico shocks
in ioconl yoais. 1hoso incluoo lho highoi onoigy omcioncy of pioouclion piocossos, lho iolovanco
of gloLalizalion in shaping piico solling, as woll as changos in lho conoucl of monolaiy policy. A
Lolloi knowloogo of lho liansmission of supply shocks Ly conlial Lanks, gioaloi inooponoonco ano
lho moio piominonl iolo of piico slaLilily in lho ioaclion funclion of monolaiy policy may havo
holpoo lo ioouco lho nominal ano ioal impacl of oil piico shocks. 1ho aim of lhis papoi is nol
lo assoss lho iolalivo iolo of oach of lhoso faclois in accounling foi lho loss iolovanl iolo of oil
nowaoays, Lul ialhoi lo ooloimino lho cuiionl impacl of oil piico changos on Spanish ano ouio
aioa consumoi piico inlalion.
Afloi lhis inlioouclion, lho sliucluio of lhis papoi is as follows. Soclion 2 inliooucos lho
oiloionl liansmission channols of oil piico changos ano oosciiplivo ovioonco is piosonloo in soclions
8 (oiiocl impacl), 4 (inoiiocl impacl) ano (socono-iouno olocls). Soclion 6 is oovoloo lo lho
quanlilalivo iosulls of a quailoily macio-oconomoliic moool foi Spain, namoo M1LL [soo Lsliaoa
ol al. (2004), Oiloga ol al. (2007)[, ano Soclion 7 lo a Dynamic Slochaslic Gonoial LquiliLiium
(DSGL) moool, calloo LLMOD [Anoios ol al. (2007) ano (2000)[. Olhoi DSGL moools havo Loon
usoo in lho liloialuio lo aooioss lho impacl of oil piico shocks [o.g. Mooina ano Solo (200), Hunl
(2006) oi Llanchaio ano Gal (2008)[. 1wo oislinguishing aspocls of oui DSGL moool is lhal il has
sopaialo soclois foi liaoaLlos ano non-liaoaLlos gooos ano consioois lwo counliios in a monolaiy
union. Accoioing Lolh lo M1LL ano LLMOD, lho olocl of an oil piico shock on CII inlalion is
iolalivoly small. Following a 10/ incioaso in lho oollai piico of ciuoo oil (wilh a half-lifo of aLoul
8 yoais), yoai-on-yoai CII inlalion iisos Ly Lolwoon 0.20 ano 0.2 poiconlago poinls on avoiago
ouiing lho lisl yoai afloi lho shock, ano Lolwoon 0.04 ano 0.18 poiconlago poinls in lho socono
yoai. Socono-iouno olocls fiom wago inooxalion aio founo lo Lo quilo mooosl in LLMOD, ano
somowhal laigoi in M1LL. Finally, soclion 8 piosonls lho main conclusions.
2 TransnIssIon cLanneIs oI oII rIce cLanges on consuner rIce
InatIon
Inloinalional oil piicos aio highly iolovanl lo unooislano lim piico solling Lohavioui, givon lhal lho
shaio of housoholo sponoing oovoloo lo iolnoo oil piooucls is suLslanlial ano lhal oil ano iolnoo oil
piooucls aio an inpul in lho pioouclion of gooos ano soivicos. 1ho liansmission mochanism linking
inloinalional oil piicos lo consumoi piico inlalion is quilo complox ano lho slionglh ano liming
of lho oiloionl channols oopono on numoious faclois, so il is concoplually usoful (Lul ompiiically
oimcull) lo Lioak oown lho linkagos inlo lisl-iouno (oiiocl ano inoiiocl) ano socono-iouno olocls.
1ho lisl-iouno olocl of highoi oil piicos on consumoi piico inoicos can Lo Liokon oown inlo
a oiiocl ano an inoiiocl olocl. 1ho oiiocl olocl iolocls lho facl lhal oil piico changos aio almosl
immooialoly passoo lhiough lo lho piicos of iolnoo oil piooucls, such as fuols oi hoaling oil, which
aio consumoo Ly housoholos.
1ho inoiiocl olocl iolocls lho chango in lho cosl of piooucing gooos ano soivicos which uso
polioloum piooucls as an inpul ano ils pass lhiough lo lnal piicos. Inousliios which omploy oil
inlonsivo lochnologios aio pailiculaily alocloo Ly changos in lho piico of oil, sinco lhoii maiginal
cosls vaiy lo a laigoi oxlonl. 1his liansmission channol has a consiooiaLly lowoi spooo of pass
lhiough lhan lho oiiocl impacl ano a slionglh lhal vaiios accoioing lo faclois such as maikol
compolilion, cyclical oovolopmonls oi lho oxpocloo liansiloiy oi poimanonl naluio of lho shock.
On lop of lhoso lisl-iouno olocls, consumoi piicos may also Lo alocloo Ly so-calloo socono-
iouno olocls. 1hoso iofoi lo lho facl lhal lisl-iouno piico changos may liiggoi a iovision of
inlalion oxpoclalions lhal loao lo a iosolling of lnal piicos, oilhoi oiioclly oi inoiioclly, lhiough
lho wago-Laigaining piocoss. On lho ono hano, iovisions in inlalion oxpoclalions may onlail piico
changos, lo lho oxlonl lhal lims liy lo mainlain piolls in ioal loims. On lho olhoi hano, if
nominal wagos aio iosol as a iosull of an oil piico shock, unil laLoui cosls of lims vaiy ano may Lo
passoo lhiough lo lnal piicos. Al any ialo, inlalion oxpoclalions of housoholos ano lims oopono
on how oxpoclalions of mooium-loim inlalion aio anchoioo Ly lho monolaiy policy fiamowoik,
so lhal inlalion oxpoclalions can iomain slaLlo following an oil piico shock if lho conlial Lank is
ciooiLlo onough.
3 TLe dIrect Inact on consuner rIces
1ho oiiocl impacl on consumoi piico inlalion of changos in oil piicos can Lo pioxioo Ly lho con-
liiLulion of consumoi onoigy piicos lo lho haimonizoo inoox of consumoi piicos (HICI). Fiom lho
Loginning of lho monolaiy union, lho avoiago conliiLulion of onoigy HICI lo hoaolino inlalion in
Spain has Loon 0.4 pp, slighlly highoi lhan in lho ouio aioa as a wholo, (Figuio 1 ano laLlo 1) ano
lhal of iolnoo oil piooucls 0.2 pp, as in lho ouio aioa. 1hoio is, howovoi, suLslanlial vaiiaLilily
in lho sizo of lho conliiLulion ovoi limo: in Spain lho yoaily conliiLulion has iangoo fiom -0.8 pp
lo 1.2 pp ano in LMU fiom -0.2 pp lo 1.1 pp. Ly piooucl lypo, lhoio aio also somo impoilanl
oiloioncos: 1ho highoi conliiLulion in Spain of piico changos in iolnoo oil piooucls, such as fuols
ano hoaling oils, iolalivo lo lho ouio aioa has Loon olsol Ly lowoi piico iisos foi olocliicily ano gas.
Figuio 1
CONSUMER PRICE INFLATION. CONTRIBUTION OF ENERGY
Sources: INE, Eurostat and Banco de Espaa.
-1
0
1
2
3
4
5
1996 1998 2000 2002 2004 2006 2008
ENERGY (pp)
NON-ENERGY (pp)
INFLATION (%) (HICP)
SPAIN
-1
0
1
2
3
4
5
1996 1998 2000 2002 2004 2006 2008
ENERGY (pp)
NON-ENERGY (pp)
INFLATION (%) (HICP)
EMU
1aLlo 1
CONTRIBUTIONS TO INFLATION
Spain EMU Germany France Italy
ENERGY
Average 1996-2008 0.4 0.4 0.5 0.3 0.3
Maximum year 1.2 1.1 1.2 1.0 0.9
Minimum year -0.3 -0.2 -0.3 -0.2 -0.2
OIL REFINED PRODUCTS (a)
Average 1996-2008 0.3 0.2 0.2 0.2 0.1
Maximum year 0.9 0.7 0.8 0.8 0.5
Minimum year -0.1 -0.2 -0.2 -0.3 -0.1
Sources: Eurostat and Banco de Espaa
(a) Liquid fuels and fuels and lubricants for personal transport equipment.
As monlionoo aLovo, lho oiiocl impacl of oil piico changos ooponos, among olhoi faclois, on
lho oxponoiluio shaio of housoholos on iolnoo oil piooucls ovoi lolal oxponoiluio. 1ho woighl foi
2008 in Spanish HICI of iolnoo oil piooucls is 6.2/ (laLlo 2). 1his coiiosponos lo a woighl of
.7/ foi lianspoil fuols ano a woighl of 0./ foi hoaling oil. 1ho oxponoiluio shaio on iolnoo oil
piooucls is consiooiaLly highoi in Spain lhan in lho ouio aioa (./), iolocling lho lowoi woighl of
lianspoil fuols in lho ouio aioa (4.6/), only pailly olsol Ly lho highoi woighl of hoaling oil (0.0/)
in LMU, which iolocls, among olhoi faclois, lho lowoi avoiago lompoialuio in mosl Luiopoan
counliios. Al any ialo, il has lo Lo sliossoo lhal housoholo sponoing on iolnoo oil piooucls has
incioasoo suLslanlially Lolh in Spain ano in lho ouio aioa, lhus loaoing lo an incioaso ovoi limo
in lho oiiocl impacl on consumoi piicos of oil piico changos. In Spain, lho woighl of iolnoo oil
piooucls in lho CII was 1./ in 1068, loss lhan a quailoi of ils woighl in 2008, an incioaso laigoly
oiivon Ly lho shaip incioaso in lho lolal numLoi of cais. In lho ouio aioa, lhis woighl was 4.8/ in
1006 -lho lisl yoai foi which lhoio is infoimalion availaLlo- , moio lhan 1 pp Lolow lho lguio foi
2008.
1aLlo 2
HICP WEIGHTS
REFINED OIL PRODUCTS (a)
(1) 1996 4.8 4.6 4.8 5.3 3.4
(2) 2008 6.2 5.5 5.6 5.2 4.9
(3)= (2)-(1) 1.4 0.9 0.8 -0.1 1.4
ENERGY
(1) 1996 7.5 9.1 10.3 9.3 6.8
(2) 2008 9.9 9.8 11.9 8.7 8.2
(3)= (2)-(1) 2.3 0.8 1.6 -0.6 1.4
Source: Eurostat.
(a) Liquid fuels and fuels and lubricants for personal transport equipment.
Losioos lho impacl of oil piico changos on moan consumoi piico inlalion, il is inloiosling lo
analyzo ils impacl on inlalion vaiiaLilily. 1aLlo 8 piosonls lho conliiLulions lo inlalion vaiiaLilily
of lho main onoigy iloms, compuloo as lho woighloo covaiianco of lhoso compononls wilh hoaolino
HICI. As can Lo soon, onoigy piicos in Spain play a majoi iolo in oxplaining inlalion luclualions
(Lul a minoi iolo in oxplaining moan inlalion). Spocilcally, onoigy piicos accounl foi 1.8/ of
HICI vaiiaLilily, of which 44.0/ coiiosponos lo fuols ano hoaling oil. 1ho majoi iolo of onoigy in
oiiving inlalion luclualions is also soon in olhoi counliios, allhough lo a smalloi oxlonl. 44.7/ of
lho vaiianco of ouio aioa HICI inlalion is oxplainoo Ly onoigy oovolopmonls ano 81.8/ Ly fuols
ano hoaling oils. 1hoso iosulls Lioaoly agioo wilh Llanchaio ano Gali (2008) who uso a sliucluial
VAI ano lno lhal oil piicos accounl foi 61/ of luclualions in hoaolino US inlalion.
1aLlo 8
CONTRIBUTIONS TO INFLATION VARIABILITY
Overall 100.0 100.0 100.0 100.0 100.0
Energy 51.3 44.7 40.2 38.0 29.3
Non-energy 48.7 55.3 59.8 62.0 70.7
Sources: Eurostat and Banco de Espaa.
1his ovioonco is consislonl wilh lho slanoaio uso of coio inlalion moasuios lhal oxcluoo on-
oigy ano wilh iosulls on micio piico oala lhal show lhal onoigy piicos chango consiooiaLly moio
fioquonlly lhan lho iosl (Dhyno ol al. (2006)). 1ho moio iolovanl iolo of onoigy piicos in Spain
vis-a-vis lho ouio aioa in oxplaining inlalion luclualions iolocls lho highoi woighl of oil iolnoo
piooucls in Spanish HICI iolalivo lo lho ouio aioa, Lul also lho oiloionl inoiiocl laxalion (laLlo
4). In Spain, oxciso oulios on lianspoil fuols which aio lump sum- aio lowoi lhan in olhoi Lu-
iopoan counliios, ano lho samo happons wilh valuo aoooo lax, which is piopoilional lo lho lnal
piico. In 2007, inoiiocl laxos in Spain accounloo foi 2.6/ of lho iolail piico of poliol ano 4.0/
of lho lnal piico of oiosol oil. In conliasl, in lho LU-1 oxcluoing Spain, lhoso shaios woio aiouno
10 pp highoi. Spocilcally, 68.1/ ano .7/, iospoclivoly. 1his oiloionlial laxalion implios lhal
foi a givon chango in lho piico of oil in inloinalional maikols, iolail piicos in Spain chango lo a
highoi oxlonl lhan in lho ouio aioa, lhus conliiLuling lo lho highoi vaiiaLilily of lhoso piicos.
1aLlo 4
Spain EU 14 (a) Germany France Italy
PETROL
Retail price 100.0 100.0 100.0 100.0 100.0
Taxes 52.6 63.1 65.0 63.7 60.1
Price without taxes 47.4 36.9 35.0 36.3 39.9
DIESEL OIL
Retail price 100.0 100.0 100.0 100.0 100.0
Taxes 45.9 55.7 56.5 55.4 52.8
Price without taxes 54.1 44.3 43.5 44.6 47.2
Source: European Commission.
(a) EU14: EU15 excluding Spain.
RETAIL PRICES AND TAXES
1ho oiiocl impacl is also alocloo Ly lho pass lhiough of lho piico of oil in inloinalional maikols
lo lnal consumoi piicos, a piocoss which is highly complox. 1hoio aio oiloionl lypos of ciuoo
oil wilh oiloionl AII giavilios (a moasuio of oonsily) ano sulphui conlonl ano, coiiosponoingly,
oiloionl piicos. Oil iolnoiios joinlly pioouco lho oiloionl oislillalos, which can Lo gioupoo as lighl
oislillalos (o.g. LIG, poliol, naphlha), mioolo oislillalos (o.g. koiosono, oiosol), hoavy oislillalos
ano iosiouum (o.g. fuol oil, lai). 1ho joinl pioouclion naluio of lho lochnological piocoss implios
lhal lho oplimal piico of a givon iolnoo oil piooucl is alocloo Ly lho oomano foi all ooiivalivos,
which will gonoially vaiy ovoi limo. Moioovoi, lhoio oxisl oiloionl iolning lochnologios, which
imply oiloionl oislillalo mixos. Finally, pioll maigins of wholosalo ano iolail liaoo luclualo ovoi
limo, foi inslanco in iosponso lo maikol compolilion.
1imo soiios lochniquos can Lo usoo lo appioximalo lhis complox piocoss, lypically unooi lho
assumplion of a conslanl olaslicily of oach iolnoo oil piooucl wilh iospocl lo lho piico of a iofoionco
ciuoo, Noilh Soa Lionl ciuoo in oslimalos foi Luiopoan counliios. 1imo soiios moools oslimaloo Ly
piooucl calogoiy show lhal lhoio is suLslanlial holoiogonoily Ly piooucl lypo (laLlo ano lguio
2). Llaslicilios aio highosl foi lianspoil fuols ano hoaling oil, whoio lhoio is a conlompoianoous
ano a ono monlh laggoo impacl ano aio quilo closo in Spain ano lho ouio aioa. Naluial gas ano
Lulano gas piicos aio iogulaloo. In Spain, lhoii piicos aio sol accoioing lo puLlishoo foimulao,
which imply lhal only laggoo olocls aio oLsoivoo. 1ho oslimaloo lolal olaslicily is 0.8. Llocliicily
piicos aio also iogulaloo, Lul lhoy nooo nol Lo closoly linkoo lo gonoialion cosls, in which polioloum
plays a consiooiaLlo loss iolovanl iolo lhan foi olhoi onoigy piooucls. 1hoso faclois oxplain lhal
no signilcanl impacl of oil piicos is founo in limo soiios iogiossions oxplaining olocliicily piicos.
Aggiogalion of lhoso iosulls shows a highoi impacl in Spain, iolocling lho highoi woighl of
oil iolnoo piooucls in lho consumplion Laskol. A 10/ incioaso in lho piico of Noilh Soa Lionl
incioasos lho HICI onoigy compononl in Spain Ly 2.1 pp ano Ly 1.7 pp in LMU.
1aLlo . 1imo soiios moools oslimaloo Ly piooucl calogoiy.
(1) Total effect after 2 months, except for gas.
(2) Traditional macro model (MTBE).
2.93
2.77
4.95
5.22
2.69
2.25
2.00
1.77
0.21 0.20 0.17
0
1
2
3
4
5
6
SPAIN EMU SPAIN EMU SPAIN SPAIN SPAIN
(2)
EMU SPAIN SPAIN
(2)
EMU
DIRECT IMPACT OF A 10% INCREASE IN THE OIL PRICE (1)
TRANSPORT
FUELS
HEATING OIL GAS ENERGY HICP
Figuio 2
Spain
Residual standard error= 1.43% R= 0.67
4 3
$
6 1 3
$
6
) 7 . 7 (
)) ( / ) ( /( )) ( / ) ( ( 20 . 0

'
t t t t t t t
Er mm Pcrude mm Er mm Pcrude mm gas Natural P
5 3 2 3
) 8 . 8 (
)) ( /( )) ( ( 37 . 0 tan

'
t t t t t
Pcrude mm Pcrude mm gas e Bu P
1
) 2 . 9 (
) 8 . 10 (
13 . 0
16 . 0
' ' '

t t t
Pcrude Pcrude fuels transport HICP
1
) 2 . 9 ( ) 0 . 8 (
27 . 0 23 . 0
' ' '

t t t
Pcrude Pcrude oil heating HICP
Givon lhal DSGL moools oo nol lypically consiooi sopaialo soclois foi oil ano foi lho oiloi-
onl iolnoo oil piooucls, oslimaloo olaslicilios- which aio consiooiaLly lowoi lhan 1- aio usoful lo
caliLialo lho inilial impacl of oil piico changos in consumoi piicos, whon conoucling simulalion
oxoicisos wilh such moools, as in soclion 7.
4 IndIrect eects on consuner rIces
1ho inoiiocl olocl on consumoi piicos is consiooiaLly haiooi lo oslimalo, so il is usoful lo consiooi
oiloionl appioachos. Among lho oiloionl non-onoigy gooos ano soivicos incluooo in lho CII
Laskol, oil ano oil iolnoo piooucls aio pailiculaily iolovanl in lho pioouclion piocoss of somo
soivicos, such as lianspoil soivicos. In Spain, piicos of Lus, unooigiouno ano laxis aio sol Ly
iogional govoinmonls oi cily councils, which lypically ioviso lhom onco a yoai, ano lhoio is no cloai
link Lolwoon lho cosl of piovioing lhoso soivicos ano lhoii iolail piicos. In conliasl, aii faios ano
iailway piicos aio maikol ooloiminoo ano lhoii piicos aio alocloo Ly oovolopmonls in inloinalional
oil maikols. Inoiioclly, aii faios aio passoo lhiough lo piicos of liavol packagos. Al any ialo, lho
woighl of aii ano iail lianspoil in lho HICI is only 0./, so ils impacl on hoaolino HICI is quilo
limiloo. 1ho small sizo of lhoso olocls is in lino wilh shoil iun olaslicilios of lho main compononls
of lho CII ano HICI. 1ho piico of oil as an oxplanaloiy vaiiaLlo in shoil-iun liansfoi funclion
moools, as in lvaioz ano Luiiiol (200), foi non-onoigy gooos ano soivicos piicos (unpiocossoo ano
piocossoo fooo piicos, non-onoigy inousliial gooos ano soivicos piicos) is nol founo lo Lo signilcanl.
Fuilhoi, as shown in soclion 6, in lho quailoily maciooconomic moool lhoio is no oiiocl impacl
of oil on non-onoigy consumoi piico inlalion. 1his is in lino wilh Hookoi (2002) oslimalos foi US
coio inlalion oi foi olhoi Luiopoan counliios (o.g. Jonooau ol al. (1000) foi Fianco).
1ho lack of signilcanl olocls Lioaoly agioos wilh lho iosulls of lho suivoy on piico solling
Lohavioui caiiioo oul Ly lho Lanco oo Lspana on a samplo of 2,008 inousliial ano soivicos lims
[lvaioz ano Hoinanoo (2007)[. Ono of lho issuos aooiossoo in lho suivoy quoslionnaiio iofoiioo
EMU
Definition of variables:
Pcrude: Price of crude oil (North Sea Brent) in euros
Er: euro dollar exchange rate
Pcrude$t : Price of crude oil in dollars
mm i : moving aerage of order i
1
) 3 . 8 (
t
) 7 . 10 (
t
Pcrude
12 . 0
Pcrude 16 . 0 fuels transport HICP
' ' '

t
1 - t
) 0 . 5 (
t
) 9 . 10 (
t
Pcrude
16 . 0
Pcrude 36 . 0 oil heating HICP ' ' '
lo lho main faclois oiiving piico changos. Fiims woio askoo lo assoss lho impoilanco of sovoial
faclois, incluoing onoigy cosls, lhal coulo loao lims lo incioaso oi oocioaso piicos.
1aLlo 6
Price increases
Mean scores (1) p-value (2)
% Relevant
factor (3)
A change in the cost of raw materials 3.12 0.00 72.6%
A change in labour costs 2.72 0.00 56.8%
A change in competitors prices 2.54 0.00 52.1%
A change in demand 2.36 0.00 43.5%
A change in energy and fuel prices 2.20 0.00 35.3%
A change in other production costs 2.10 0.89 32.0%
An improvement in design, quality or the product range 2.09 0.00 34.0%
A change in productivity 1.91 0.00 27.3%
A change in financial costs 1.77 -- 19.4%
Price decreases
Mean scores (1) p-value (2)
% Relevant
factor (3)
A change in competitors prices 2.66 0.08 57.2%
A change in the cost of raw materials 2.54 0.00 51.7%
A change in demand 2.43 0.00 48.1%
The intention of gaining market share 2.20 0.00 40.1%
A change in labour costs 1.96 0.00 29.3%
A change in productivity 1.85 0.01 25.9%
A change in energy and fuel prices 1.83 1.00 23.1%
A change in other production costs 1.83 0.00 23.5%
A change in financial costs 1.55 -- 13.4%
(3) % important denotes the fraction of firms rating the factor as important or very important.
(2) The p-value in columns 2 refers to the null hypothesis that the factor's mean scores (reported in colum 1) is
Driving factors of price increases and decreases
(1) Respondents are asked in question C1 to indicate the importance of each factor, the alternative scores being: (1)
unimportant, (2) of minor importance,(3) important, (4) very important.
1aLlo 6 piosonls lho ianking of oiiving faclois Lohino piico changos using moan scoios (in a
scalo fiom 1 (unimpoilanl) lo 4 (voiy impoilanl)) ano of lho shaio of lims lhal slalo lhal a givon
facloi is impoilanl oi voiy impoilanl. Lolh moasuios show lhal onoigy cosls aio nol consiooioo Ly
lim managois lo Lo a majoi oiivoi of piico changos. In facl, only 8/ of lims slalo lhal onoigy
cosls aio impoilanl oi voiy impoilanl lo oxplain piico incioasos. 1his ioason is ovon loss impoilanl
foi ooloimining piico culs, sinco only 28/ of lims iopoil lhal onoigy cosls aio a iolovanl facloi in
oxplaining piico oocioasos. 1ho minoi iolo of onoigy cosls is also appaionl in loims of lho ianking
of possiLlo oxplanalions. 1his ioason is iankoo fouilh oul of 0 oxplanaloiy faclois in loims of piico
incioasos ano lflh in loims of piico oocioasos. Cosl of olhoi maloiial inpuls ano laLoui cosls aio
lho main ooloiminanls of piico incioasos. Ly conliasl, lho mosl iolovanl faclois loaoing lo piico
oocioasos aio changos in compolilois` piicos, lho cosl of olhoi iaw maloiials, ano in oomano.
As oxpocloo, lho suivoy also shows consiooiaLlo socloial holoiogonoily in lho iolo of onoigy
as a oiivoi of piico changos. Lnoigy piicos aio pailiculaily impoilanl lo oxplain piicos in lho
pioouclion of onoigy, onoigy liaoo ano also in lho lianspoil socloi. In conliasl, lhoy aio haioly
iolovanl in communicalions ano non-onoigy liaoo, so lho impacl on non-onoigy consumoi piicos
can Lo oxpocloo lo Lo quilo limiloo.
1ho qualilalivo infoimalion fiom lho suivoy on piicing Lohavioui is suppoiloo Ly quanlilalivo
nalional accounls oala. Inpul-oulpul laLlos piovioo infoimalion on lho cosl sliucluio of lho oif-
foionl inousliios. Inoooo, il olois oolailoo infoimalion on lho maloiial inpuls usoo in lho oiloionl
pioouclion piocossos, which can Lo usoo lo ooloimino lho shaio of oil ano fuols, olhoi onoigy iloms
ano non-onoigy maloiial inpuls. Fuilhoi, il piovioos infoimalion on laLoui cosls, in loims of com-
ponsalion poi omployoo. As can Lo soon in 1aLlo 7, lho shaio of oil ano fuols cosls in lolal cosls is
faiily small (8.4/ in Spain, ano 2.0/ in LMU), oxcopl foi lho pioouclion of onoigy. 1hoso small
shaios suggosl lhal inoiiocl impacls of oil piico shocks aio likoly lo Lo quilo limiloo.
1aLlo 7
COST STRUCTURE (%)
OIL AND FUELS
COSTS
OTHER ENERGY
COSTS
OTHER
INTERMEDIATE
CONSUMPTION
COSTS
COMPENSATION
PER EMPLOYEE
TOTAL
Total economy 3.4 2.0 61.4 33.2 100
Energy 21.1 18.5 45.3 15.1 100
Industry 5.7 1.9 73.8 18.6 100
Services 1.3 1.3 54.0 43.4 100
Total economy 2.9 1.6 59.3 36.2 100
Energy 13.9 20.2 44.0 21.9 100
Industry 5.2 1.6 71.7 21.5 100
Services 1.2 0.9 50.9 47.0 100
SPAIN
EMU (a)
COST STRUCTURE OF DIFFERENT INDUSTRIES. INPUT OUTPUT TABLE, BASIC PRICES. YEAR 2005
SOURCE: Eurostat.
a. EMU: Germany, France and Spain.
1ho sizo of inoiiocl olocls of oil piico changos logically ooponos on lho omcioncy ano oil in-
lonsily of pioouclion piocossos. Oil piico shocks in lho oaily 1070s liiggoioo lho oovolopmonl of
moio onoigy-omcionl pioouclion funclions, which havo iooucoo lho uso of oil poi unil of oulpul.
Moioovoi, lhoio havo Loon socloial changos in lho composilion of valuo aoooo ano pioouclion, ano
oil inlonsivo inousliios aio loss impoilanl now (Mailn ol al. (2008)). As a iosull, lho uso of oil poi
unil of oulpul was almosl 20/ lowoi lhan in 1078. Nolwilhslanoing lhis, oil ooponooncy in Spain
is slill highoi lhan in olhoi inousliializoo oconomios. Accoioing lo oala fiom lho Inloinalional
Lnoigy Agoncy, oil is lho mosl iolovanl souico of piimaiy onoigy. In Spain, lhis shaio was 8/ in
200 lho lasl yoai foi which lhoio is infoimalion availaLlo, 17 pp lowoi lhan in 1078. In luin, in
Luiopoan OLCD counliios, lhis shaio was 46/ in 200, 12 pp lowoi lhan in 1078. 1his ovioonco
suggosls lhal inoiiocl olocls of oil piico shocks will Lo smalloi nowaoays lhan lhoy woio in lho pasl.
1hoio is signilcanl cioss-inousliy holoiogonoily, lhough. Oil inlonsily is voiy high in lho lianspoil
socloi, whoio il has haioly changoo in lho lasl oocaoos ano consiooiaLly smalloi in manufacluiing
ano lho iosl of lho oconomy. A compaiison of Spain wilh Luiopoan OLCD counliios iovoals lhan
lho oil inlonsily of Spanish manufacluiing ano lianspoil inousliios is voiy similai, whoioas il is
highoi foi lho iosl of lho oconomy.
5 Second round eects
As monlionoo aLovo, oiiocl ano inoiiocl olocls of oil piico shocks may havo an impacl on lims` ano
housoholos` inlalion oxpoclalions ano on wago solling, loaoing lo so-calloo socono iouno olocls. In
ioconl oocaoos, gioaloi inooponoonco of conlial Lanks ano piico slaLilily oiionloo monolaiy policios
havo conliiLuloo againsl a Lackgiouno in which inlalion has iomainoo low- lo anchoi inlalion
oxpoclalions of piivalo agonls, allhough lo lho oxlonl lhal wago solling ooponos on pasl inlalion,
liansiloiy shocks on inlalion loao lo changos in lims` cosls.
In Spain, social pailnois signoo a colloclivo Laigaining agioomonl (Acuoioo Inloiconfoooial
paia la Nogociacion Colocliva) in 2002, ano lhis agioomonl has Loon ionowoo ovoiy yoai sinco
lhon. Accoioing lo lho agioomonl, lho omcial inlalion iofoionco laigol (2/) is omployoo in wago
Laigaining, ano wago incioasos aLovo lhal lguio shoulo Lo iolaloo lo pioouclivily incioasos in
oiooi lo conliiLulo lo posilivo omploymonl giowlh. In ioluin, mosl solllomonls incluoo inooxalion
clausos, which como inlo olocl whonovoi inlalion oxcooos lho iofoionco laigol, Lul nol if lhoy
aio Lolow il. 1his has lho unoosiiaLlo implicalion lhal oil-iolaloo inlalion incioasos fooo lhiough
lo laLoui cosls, lo lho oxlonl lhal inooxalion clausos como inlo olocl, hinooiing lho aojuslmonl
piocoss of lho Spanish oconomy (lguio 8).
Figuio 8
OIL PRICE INCREASES AND INFLATION
ADJUSTMENT CLAUSES (a)
SOURCE: Banco de Espaa.
a. Annual figures: 1991-2008
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
-40 -20 0 20 40 60
pp
OIL PRICE INCREASE
S
I
Z
E

O
F

I
N
F
L
A
T
I
O
N

A
D
J
U
S
T
M
E
N
T
C
L
A
U
S
E
S
%
Complomonlaiy infoimalion on lho likoly impoilanco of socono iouno olocls can Lo oLlainoo
fiom lims` ano oxpoils` quoslionnaiios of lho Luiosyslom Wago Dynamics Nolwoik (WDN). Fiim
suivoys on wago solling havo Loon caiiioo oul in ouio aioa counliios (Diuanl ol al. (2008)).
Quoslionnaiios may shoo somo lighl on lho iolo of wago inooxalion, sinco lims woio askoo wholhoi
lhoy chango Laso wagos accoioing lo inlalion oi nol ano, in lhal caso, wholhoi lhis aojuslmonl is
aulomalic oi nol, ano wholhoi il iofois lo pasl oi oxpocloo inlalion.
1aLlo 8
EXPERT SURVEY FIRM SURVEY
PERCENTAGE OF
WORKERS COVERED
BY WAGE
INDEXATIONS
CLAUSES
TOTAL
AUTOMATIC LINK
TO PAST INFLATION
AUTOMATIC LINK TO
EXPECTED INFLATION
NO FORMAL RULE.
PAST INFLATION
TAKEN INTO
ACCOUNT
NO FORMAL RULE.
EXPECTED INFLATION
TAKEN INTO
ACCOUNT
Spain >75% 70 38 16 11 5
Euro area 31 13 4 6 7
Germany None 27 na na na na
France <25% 33 1 5 5 21
Italy <25% 6 1 1 3 2
POLICIES OF ADJUSTING BASE WAGES TO INFLATION
SOURCES: Expert survey: Du Caju et al. (2008). Firm survey: Druant et al. (2008)
Accoioing lo lhis lim suivoy, 40/ of Spanish lims lako inlo accounl pasl inlalion whon solling
wagos ano 70/ aojusl Laso wagos lo pasl oi oxpocloo inlalion. 1hoso lguios aio consiooiaLly highoi
lhan in lho ouio aioa, whoio 10/ of lims lako inlo accounl pasl inlalion ano 81/ pasl oi oxpocloo
inlalion. Nonolholoss, givon lhal woikois ano lims Laigain ovoi ioal wagos, il is suipiising lhal a
laigo numLoi of lims iopoil lhal pasl oi oxpocloo inlalion plays no iolo in wago solling, so lhoso
suivoy iosulls havo lo Lo inloipioloo wilh ouo caio. 1ho infoimalion pioviooo Ly lims in suivoys
on wago solling is conlimoo Ly a quoslionnaiio llloo in Ly nalional conlial Lanks oxpoils (Du Caju
ol al.(2008)). Accoioing lo lhis suivoy, moio lhan 7/ of Spanish woikois aio covoioo Ly wago
inooxalion clausos, whoioas lhis shaio is lowoi lhan 2/ in lho main ouio aioa counliios. Wo havo
usoo lhoso lguios in lho caliLialions of oui DSGL moool. 1ho highoi iolo of inooxalion clausos
in Spain suggosls lhal socono-iouno olocls may Lo highoi in Spain lhan in lho main Luiopoan
counliios.
6 TLe oII sLock In a nacroecononetrIc nodeI
1ho Lank of Spain`s Quailoily Moool (M1LL) is a laigo-scalo maciooconomoliic moool usoo foi
mooium loim maciooconomic foiocasling of lho Spanish oconomy, as woll as foi poifoiming sconaiio
simulalions. 1ho sliucluio of M1LL is lhal of a small opon oconomy wilhin a monolaiy union [Soo
Lsliaoa ol al. (200) ano Oiloga ol al. (2007) foi a oolailoo oosciiplion of lho moool[. 1ho moool,
ospocially in lho shoil iun, is moslly oomano oiivon ano is spociloo as a sol of oiioi coiioclion
oqualions. M1LL incluoos lho oil piico as an oxogonous vaiiaLlo, which allows lo quanlify lho
olocl on lho Spanish oconomy of an incioaso in lho piico of oil. In lhis papoi, wo uso an upoaloo
voision of Oiloga ol al. (2007) oslimalos.
In M1LL
1
, oil piicos (poi) havo a oiiocl impacl on lho onoigy compononl of lho haimonizoo
inoox of consumoi piicos (hicpo) ano on lho oolaloi of impoils of gooos fiom oulsioo lho ouio aioa
(mgno), whoso oslimaloo oqualions aio lho following:
/icjc
= 0.10 0.02
()
jjcdtrid 0.08
(0.00)
jci
^/icjc = 0.16
()
^jjcdtrid
1
0.64
(0.02)
^:qcd 0.20
(0.00)
^jci 0.08
(0.SS)
(/icjc
1
/icjc
1
)
:q:d
= 0.22 0.78
()
c:q:d 0.10
(0.00)
jci 0.12
(0.00)
jr: 0.20 J082
^:q:d = 0.01 0.28
()
^jjcd
2
0.81
(0.00)
^c:q:d 0.22
(0.00)
^jci 0.02
(0.0)
^jci
S
0.07
(0.01)
^jr: 0.00
(0.02)
(:q:d
1
:q:d
1
)
Accoioing lo lhoso oqualions, lho onoigy compononl of lho HICI is an avoiago of nalional
(pyooliio) ano oil piicos. In lho long iun, lho oslimaloo woighl is consiooiaLly highoi foi oomoslic
piicos. 1ho oqualion foi lho oolaloi of impoils of gooos fiom oulsioo lho ouio aioa has a similai
sliucluio, Lul givos highoi woighls lo oxloinal piicos, ospocially in lho long iun.
In M1LL, il is assumoo lhal agonls consiooi nalional accounl oolalois whon laking lhoii
Lohavioial oocisions, insloao of haimonizoo inooxos of consumoi piicos. As a iosull, changos in
hicpo oo nol alocl lho iosl of lho oconomy, Lul lhoso of lho oolaloi of impoils of gooos fiom
oulsioo lho ouio aioa (mgno) oo.
1ho piivalo consumplion oolaloi (pco) is usoo Ly housoholos lo oolalo nominal incomo ano
woallh, ano, moio impoilanlly in lho caso of an oil piico shock, piivalo socloi wagos. 1hoso aio
1
All vaiiaLlos in logs, unloss slaloo olhoiwiso. . oonolos lisl oiloionco.

oonolos long iun iolalionship. I-valuos
in Liackols. (-) oonolos a consliainoo coomcionl. 1ho oolnilion of lho vaiiaLlos usoo in lhoso oqualions is as follows:
cmgoo: piicos of compolilois of impoils of gooos fiom lho ouio aioa
cmgno: piicos of compolilois of impoils of gooos fiom oulsioo lho ouio aioa
hicpo: onoigy compononl of haimonizoo inoox of consumoi piicos
hicpno: non-onoigy compononl of haimonizoo inoox of consumoi piicos
mgoo: oolaloi of impoils of gooos fiom lho ouio aioa
mgno: oolaloi of impoils of gooos fiom oulsioo lho ouio aioa
mgnopoi: oolaloi of impoils of gooos fiom oulsioo lho ouio aioa wilhoul oil
mso: oolaloi of impoils of soivicos
pco: oolaloi of piivalo consumplion
poi: inloinalional piico of oil, in ouios
pln: piivalo socloi omploymonl
pim: inloinalional piico of iaw maloiials, in ouios
pwun: piivalo socloi wagos
pyoo: oolaloi of piivalo valuo aoooo
pyooiio: oolaloi of piivalo VA wilhoul housing
pyooliio: oolaloi of piivalo VA wilhoul housing wilh laxos
pyoi: piivalo valuo aoooo
lwoo: lax woogo (cioaloo Ly laxos on laLoui componsalion)
UIX: unomploymonl ialo (lovol)
J082: slop oummy in 1008Q2
Diifl00: oiifl, slailing in 1000
AcDiifl00: accumulaloo wago oiifl sinco 1000
mooolloo as lho iosull of a Laigaining piocoss Lolwoon lims ano woikois, which lako ioal avoiago
pioouclivily (pyoi-pln) as a Lonchmaik, Lul uso pioouclion ano consumplion oolalois, iospoclivoly,
lo oolalo nominal wagos (pwun). 1his cioalos a link of wagos lo cuiionl consumoi ano piooucoi
piico inlalion (in lho shoil iun) ano also lo pasl inlalion (lhiough ils oovialion fiom lho long-iun
oquiliLiium valuo). 1ho oqualions foi lho piivalo consumplion oolaloi ano nominal wagos aio as
follows:
jcd
= 0.01 0.87
(0.00)
jjcdrid 0.08
()
:qcd 0.0
()
:q:d 0.01
()
::d
^jcd = 0.00 0.8
()
^jjcdrid 0.07
(0.01)
^:qcd 0.08
(0.00)
^:q:d 0.81
(0.09)
(jcd
1
jcd
1
)
jnn:
= 0.08 [(0.41
()
jjcd 0.0
(0.00)
jcd) (jjcr j|:)[ tncd 0.18
(0.0)
l1A 0.004
(0.00)
c1ri)t00
^jnn: = 0.4
(0.00)
[(0.48
(0.00)
^jjcd 0.7
()
^jcd) (jjcr j|:)[ 0.40
(0.07)
l1A
S
0.002
(0.00)
1ri)t00 0.22
(0.00)
(jnn:
1
jnn:
1
)
1ho oolaloi of piivalo valuo aoooo (pyoo) is lho main piico channol in M1LL. Il is assumoo
lhal lho iopiosonlalivo lim has a coilain oogioo of maikol powoi ano is lhus aLlo lo piico ils
piooucl al a coilain maigin aLovo ils maiginal cosls, which, givon lho CoLL Douglas lochnology
usoo, oquals unil laLoui cosls. Fiims` maigins aio mooolloo as a funclion of lho lovol of oxloinal
compolilion, which moans lhal incioasos in compolilois` piicos (cxgoo) ioouco compolilion fiom lho
oxloinal socloi ano poimil Spanish lims lo incioaso lhoii maigins. Domoslic piicos aio lhoiofoio a
woighloo avoiago of oomoslic ano oxloinal faclois. As a consoquonco, Lolh lho oolaloi of impoils
of gooos (mgo) ano piivalo socloi wagos, appoai in lho oqualion foi lho oolaloi of piivalo valuo
aoooo:
jjcd
= 0.74 0.6
()
(jjcr j/r) 0.000
()
T11 0.02
()
jnn: 0.08
(0.00)
crqcd 0.00
(0.00)
T00
^jjcd = 0.01 0.10
(0.07)
^:qd
1
0.11
(0.01)
^:qd
1
0.27
(0.01)
^jnn:
0.16
(0.12)
^jnn:
1
0.22
(0.0S)
(jjcd
1
jjcd
1
)
Changos in lhis piivalo valuo aoooo oolaloi alocl mosl piicing oocisions in lho moool. Foi
inslanco, in lho caso of lho non-onoigy compononl of lho HICI, whoso oqualion is, as in lho caso
of all olhoi piicos, an aggiogaloi of inloinal ano oxloinal piicos, wo havo:
/icj:c
= 0.1 0.80
(0.00)
jjcdtrid 0.14
()
:qcd 0.06
()
:q:djci 0.01
()
::d
^/icj:c = 0.00 0.80
()
^/icj:c
2
0.20
(0.02)
^jjcdtrid 0.18
(0.0)
(/icj:c
1
/icj:c
1
)
Givon lho piopagalion mochanisms lhal havo jusl Loon oxplainoo, lho impacl of a 10/ iiso in
lho piico of oil on lho Spanish oconomy, accoioing lo M1LL, woulo Lo as summaiizoo in lho lisl
Llock of laLlo 0 (onoogonous wagos).
As can Lo soon, lho incioaso in lho piico of oil is quickly passoo lhiough lo consumoi piicos.
Afloi ono yoai, lho onoigy compononl of HICI iisos Ly 1.8 pp ano impoil piicos Ly 0.0 pp. Losioos
lho oiiocl impacl, lhoio aio somo inoiiocl ano socono iouno olocls al woik. Wagos ioacl lo a
lossoi oxlonl lhan consumoi oi impoil piicos, Lul lhoii iiso in iosponso lo highoi inlalion makos
laLoui as a pioouclivo inpul iolalivoly loss alliaclivo lo lims, which hiio loss pooplo ano invosl
moio
2
. Housoholos` oisposaLlo incomo falls, ouo lo lowoi omploymonl ano ioal wagos, so housoholos
iosliain lhoii oxponsos, Lolh in consumplion ano in housing invoslmonl. 1his lowoi oomano in lho
mooium loim piompls lims lo hiio ovon loss pooplo, ano also has a nogalivo impacl on invoslmonl.
1aLlo 0
Efects from a 10% rise in the price of oil according to MTBE
Accumulated percentage diferences frombase scenario
1. PRICES AND COSTS
Harmonized index of consumer prices (HICP) 0.25 0.38 0.33 0.23 0.28 0.20
Non-energy component of HICP 0.07 0.25 0.22 0.05 0.15 0.09
Energy-component of HICP 1.79 1.59 1.33 1.77 1.53 1.27
GDP defator 0.16 0.18 0.03 0.10 0.05 -0.08
Private consumption defator 0.29 0.23 0.03 0.22 0.11 -0.04
Defator of exports of goods and services 0.06 0.12 0.00 0.04 0.05 -0.04
Defator of imports of goods and services 0.91 0.83 0.63 0.89 0.79 0.61
Unit labour costs 0.09 0.25 0.08 0.00 0.10 -0.03
Compensation per employee 0.08 0.17 0.16 0.00 0.01 0.03
2. ACTIVITY (constant prices)
GDP 0.01 -0.21 -0.27 0.01 -0.21 -0.27
Private consumption -0.04 -0.09 -0.18 -0.04 -0.09 -0.20
Public consumption 0.00 0.00 0.00 0.00 0.00 0.00
Gross fxed capital formation 0.06 -0.11 -0.39 0.04 -0.21 -0.47
Exports of goods and services -0.01 -0.09 -0.06 -0.01 -0.05 -0.01
Imports of goods and services -0.06 0.12 -0.07 -0.08 0.08 -0.08
Contributions to growth of real GDP
National demand (diference in levels) 0.00 -0.08 -0.21 -0.01 -0.11 -0.24
Net exports (diference in levels) 0.02 -0.05 0.01 0.03 -0.03 0.03
3. OTHER VARIABLES
Unemployment rate (diference in levels) -0.01 0.08 0.20 -0.01 0.07 0.19
Employment 0.02 -0.12 -0.35 0.02 -0.11 -0.34
Real disposable income -0.17 -0.24 -0.19 -0.15 -0.25 -0.24
exogenous wages endogenous wages
year
2
year
3
year
1
year
2
year
3
year
1
1o appioximalo lho impacl of lho onoogonoily of wagos, an aooilional simulalion has Loon
caiiioo oul, laking wagos as oxogonous, lhus shulling oown lho socono iouno olocls lhal como
lhiough wago inooxalion ano lho oioinaiy iosponso of wagos. 1ho iosulls of lhis oxoiciso aio
summaiizoo in lho socono Llock of laLlo 0 (oxogonous wagos), ano compaioo lo lho iosulls of lho
Lasolino simulalion in lguio 4.
2
A shoilcoming of M1LL is maoo cloai hoio: lho moool is nol foiwaio-looking ano il ooos nol incluoo iolovanl
supply-sioo olocls lhal woulo moio lhan olsol lhis posilivo olocl on invoslmonl. Il also ooos nol incluoo oil as a
pioouclion inpul, honco unooioslimaling lho highoi pioouclion cosls associaloo wilh highoi oil piicos.
Figuio 4
Effects from a 10% rise in the price of oil with endogenous and exogenous wages
HICP energy HICP non-energy HICP
GDP deflator Private consumption deflator Imports deflator
GDP Employment Private sector wages
baseline simulation (endogenous wages) exogenous wages
0,0
0,1
0,2
0,3
0,4
0,5
-0,2
-0,1
0,0
0,1
0,2
0,3
-0,4
-0,3
-0,2
-0,1
0,0
0,1
0,0
0,5
1,0
1,5
2,0
-0,1
0,0
0,1
0,2
0,3
0,4
-0,5
-0,4
-0,3
-0,2
-0,1
0,0
0,1
-0,1
0,0
0,1
0,2
0,3
0,0
0,2
0,4
0,6
0,8
1,0
1,2
-0,1
0,0
0,1
0,2
0,3
1hoso iosulls holp pin oown lho quanlilalivo impoilanco of lho mosl iolovanl socono-iouno
olocls in lho moool, namoly lho mulual foooLack fiom piicos lo wagos lhal aiisos in a fiamowoik
in which lims sol piicos on lho Lasis of lhoii maiginal cosl ano woikois caio aLoul lhoii ioal
puichasing powoi whon Laigaining wagos. 1ho iosulls fiom lhis simulalion wilh oxogonous wagos
show lhal limiling lho iosponso of wagos lo liansiloiy changos in inlalion woulo havo somo impacl
on piico solling, allhough ils magniluoo is limiloo.
As a summaiy of lho iosulls fiom M1LL, laLlo 10 Lioaks oown lho lolal olocl oLlainoo fiom
lho Lasolino simulalion in lhioo compononls: lho oiiocl impacl, as oslimaloo in lho moool, lho
aooilional inoiiocl olocl capluioo Ly lho simulalion wilh oxogonous wagos, ano lho socono-iouno
olocls lhal aio oLlainoo Ly lho oiloionco Lolwoon simulalions wilh onoogonous ano oxogonous
wagos. 1ho lasl lino of lho laLlo iopoils a iango of oslimalos of lolal olocls in lho ouio aioa
as a wholo, oLlainoo fiom olhoi laigo-scalo maciooconomic moools such as lho Aioa Wioo Moool
(Luiopoan Conlial Lank), lho QULS1 moool (Luiopoan Commission), NiGLM (Nalional Inslilulo
of Lconomic ano Social Iosoaich), lho Inloilink moool (OLCD) ano Mullimoo (IMF). As can Lo
soon, lho M1LL-Lasoo lolal olocl on Spanish inlalion falls wilhin lho lalloi iango of oslimalos.
Impact of a 10%rise in the international price of oil
Year 1 Year 2 Year 1 Year 2
2 2 . 0 - 1 0 . 0 3 1 . 0 5 2 . 0 ) 1 ( t c e f f e l a t o T
0 0 . 0 0 0 . 0 0 0 . 0 0 2 . 0 ) 2 ( t c e f f e t c e r i D
2 2 . 0 - 1 0 . 0 5 0 . 0 3 0 . 0 ) 3 ( t c e f f e t c e r i d n I
Second-round efect (4) 0.02 0.07 0.00 0.00
Euro area total efect (5) 0.06 to 0.32 0.02 to 0.22 -0.02 to -0.16 -0.06 to 0.04
Infation GDP (rate of growth)
(1) Results from baseline simulation with MTBE.
(2) Coefficients in equations, and weight of energy in total HICP.
(3) Results from simulation with exogenous wages, minus (2).
(4) Results from baseline simulation minus (2) minus (3).
(5) Results for the euro area from other large-scale macroeconomic models (ECB AWM, EC QUEST, NiGEM, OECD Interlink, IMF Multimod)
Accoioing lo lhoso iosulls, lho main inlalionaiy impacl on lho lisl yoai in Spain coiiosponos
lo lho oiiocl ono, whoioas in lho socono yoai socono-iouno olocls ano inoiiocl olocls Locomo moio
iolovanl. Nolo, howovoi, lhal lho quanlilalivo impacl of inoiiocl ano socono iouno olocls is limiloo.
1ho inlalionaiy impacl foi lho ouio aioa oilois suLslanlially accoioing lo lho moool usoo, Lul
in gonoial olocls foi lho socono yoai aio consiooiaLly lowoi lhan foi lho lisl yoai, ano oil shocks
havo a smalloi ioal impacl lhan lho nominal ono. In Spain, oil piico shocks aio liansmilloo moio
slowly lo GDI lhan lo inlalion ano lho impacl on lho socono yoai is highoi lhan lhal of lho lisl
ono, whoioas in lho ouio aioa lho laigosl impacl is on lho lisl yoai.
7 CeneraI equIIILrIun eects oI an oII rIce sLock
An alloinalivo appioach lo analyzing lho olocls of an oil shock on lho Spanish oconomy is lo
uso a micio-founooo, gonoial oquiliLiium moool whoio housoholos consumo oil iolaloo piooucls
ano oil is an inpul in lho pioouclion funclion of lims. 1his Locomos ospocially usoful whon il
comos lo poifoiming counloi-faclual simulalions lhal allow lo unooislano lho inloiaclion Lolwoon
pailiculai sliucluial foaluios of lho oconomy ano lho olocls of lho oil shock. Spocilcally, wo uso
lho Lank of Spain DSGL moool of lho Spanish oconomy (LLMOD). Wo iofoi lho ioaooi lo Anoios
ol al. (2006) ano Anoios ol al.(2000) foi lho oolails of lho moool piopoilios ano oslimalion. Hoio,
on lho lhooiolical sioo, wo limil ouisolvos lo piosonling lho main foaluios of lho moool, paying
spocial allonlion lo lho iolo of oil in consumplion ano pioouclion oocisions ano in piico ano wago
oynamics. On lho ompiiical sioo, wo caiiy oul a caioful caliLialion of somo paiamolois ano oosciiLo
lho oslimalion piocoss of lho iosl of lho paiamolois.
7.1 OvervIev oI tLe nodeI
1ho moool consioois lhioo oconomios: Spain, lho iosl of lho ouio aioa (Lolh of which aio suLjocl
lo a common monolaiy policy), ano lho iosl of lho woilo, which is lioaloo as oxogonous. 1ho
Luiosyslom is assumoo lo sol nominal inloiosl ialos accoioing lo a 1ayloi iulo foaluiing ouio aioa
hoaolino CII inlalion (which incluoos consumoi onoigy piicos) ano oulpul giowlh, along wilh
a coilain oogioo of inloiosl ialo smoolhing. 1ho oiloionl oconomios aio linkoo Ly liaoo lows.
1hoio aio lwo soclois of aclivily in oach onoogonous counliy Llock: liaoaLlos ano non-liaoaLlos.
1ho moool oisplays lho usual ioal fiiclions in lho cuiionl vinlago of DSGL moools, such as haLil
foimalion in consumplion, invoslmonl aojuslmonl cosls ano vaiiaLlo capilal ulilizalion. Nominal
piicos ano nominal wagos aio Lolh suLjocl lo aojuslmonl * Calvo (1088) ano Lackwaio-looking
inooxalion.
Wo assumo lhal Spain ano lho ouio aioa aio oil impoilois ano lhal lho oollai piico of oil is
oxogonous. 1ho consumplion Laskol of housoholos, c
t
, is a CLS Laskol of liaoaLlo gooos, c
T,t
,
ano non-liaoaLlo gooos, c
.,t
. Cosl minimizalion Ly housoholos implios lhal nominal consumplion
sponoing oquals 1
C
t
c
t
, whoio
1
C
t

.
.
1
.
.,t
.
T
1
.
T,t
is lho Consumoi Iiico Inoox (CII), 1

.,t
is lho piico inoox of non-liaoaLlo gooos, 1
T,t
is lho
piico inoox of liaoaLlo gooos, .
.
, .
T
aio lho coiiosponoing woighls ano -
C
is lho olaslicily of
suLslilulion Lolwoon Lolh lypos of consumplion. 1ho Laskol of liaoaLlo consumplion gooos is
givon in luin Ly a CLS aggiogaloi. 1ho coiiosponoing piico inoox of liaoaLlo consumplion gooos
is givon Ly
1
T,t

.
1
1
.
1,t
.
1
1
.
1,t
.
1W
1
.
1W,t
.
ci|
1
.
ci|,t
,
whoio 1
1,t
is lho piico inoox of homo liaoaLlo gooos, 1
1,t
ano 1
1W,t
aio lho piico inooxos of gooos
fiom lho iosl of lho Luio Aioa ano lho iosl of lho Woilo, iospoclivoly, 1
ci|,t
is lho Luio piico of oil,
-
T
is lho olaslicily of suLslilulion Lolwoon lho oiloionl lypos of liaoaLlo gooos ano .
ci|
moasuios
lho woighl of oil consumplion in lho Laskol of liaoaLlos. 1ho oiiocl impacl of an oil piico shock
on CII inlalion is laigoly ooloiminoo Ly lho lalloi paiamoloi.
1ho inoiiocl impacl of lho oil piico shock will oopono on lho piicos of lho olhoi compononls
of lho consumplion Laskol. 1ho piico inooxos of non-liaoaLlo consumplion gooos ano liaoaLlos
consumplion gooos piooucoo al homo aio givon Ly 1
.,t

.
t
1
.,t
ano 1
1,t

T
t
1
1,t
, iospoc-
livoly, whoio
S
t
is piooucoi piico inlalion in oach socloi o , T. Fiims in socloi o iosol piicos
oplimally wilh pioLaLilily 0
S
oach poiioo, iogaioloss of lho limo olapsoo sinco lho lasl aojuslmonl.
1ho fiaclion of lims lhal cannol iosol piicos oplimally aojusl lhom accoioing lo an inooxalion iulo
lo calch up wilh laggoo socloial inlalion. In lho log-linoai appioximalion of lho moool, piooucoi
piico inlalion in socloi o is givon Ly
S
t
c
S
S
t

0
S

,0
S
0
S
:c
S
t
,1
t

S
t
c
S
S
t
, (1)
whoio , is a oiscounl facloi, c
S
is lho oogioo of Lackwaio-looking inooxalion ano :c
S
t
is lho socloi-
spocilc ioal maiginal cosl. 1ho paiamoloi c
S
allows lo consiooi no piico inooxalion (c
S
),
as in lho slanoaio Calvo moool, oi full piico inooxalion (c
S
), as in Chiisliano ol al. (200).
Ioal maiginal cosls aio ooloiminoo Ly lho cosl-minimizalion pioLlom of lims. Oulpul in socloi
o = , T is givon Ly lho following CLS pioouclion funclion,
j
S,t
=

1,
S
o
(,
1),
S,t
(1
S
)
1,

(cn
S,t
/
S,t
)
c
:
1c
S,t
(,
1),
(,
1)
,
whoio o
S,t
, /
S,t
ano :
S,t
aio oil, capilal ano laLoi inpuls, iospoclivoly, cn
S,t
is capilal ulilizalion
(oqual lo 1 in lho sloaoy slalo), c
S
is lho capilal shaio of valuo aoooo, ,
S
is lho olaslicily of suL-
slilulion Lolwoon oil ano lho olhoi inpuls in lho pioouclion funclion ano
S
is a woighl paiamoloi
lhal moasuios lho impoilanco of oil in lho pioouclion piocoss. SuLjocl lo lho pioouclion funclion,
cosl minimizalion Ly lims implios lho following oxpiossion foi ioal maiginal cosl,
:c
S
t
=
j
ci|
t
0j
S,t
,0o
S,t
,
whoio j
ci|
t
is lho ioal piico of oil ano 0j
S,t
,0o
S,t
is lho maiginal pioouclivily of lho oil inpul. Coloiis
paiiLus, an incioaso in lho ioal piico of oil will push up ioal maiginal cosls ano, fiom oqualion (1),
piooucoi piico inlalion. In lho iosl of lho Luio Aioa, piooucoi piico inlalion of liaoaLlo gooos is
givon Ly an oqualion analogous lo (1), foi o = T, which in luin ooloiminos lho ovolulion of 1
1,t
.
On lho olhoi hano, laLoi oomano in Spain ooponos ciilically on lho ovolulion of nominal wagos,
\
t
. 1ho lalloi ovolvo accoioing lo \
t
=
W
t
\
t1
, whoio
W
t
is nominal wago inlalion. Following
Licog ol al. (2000), wo assumo lhal nominal wagos aio sol Ly lho woikois (who acl as monopolislic
suppliois of laLoi), ano lhal oach poiioo only a fiaclion 0
W
of woikois iosol oplimally lhoii nominal
wago. 1hoso woikois lhal oo nol oplimally aojusl wagos aoapl lhom aulomalically in lino wilh a
mulliplo c
W
of CII inlalion,
C11
t1
1
C
t
,1
C
t1
. Up lo a lisl oiooi appioximalion, wago inlalion
is givon Ly
W
t
c
W
C11
t1
=
1 0
W

1 ,0
W
0
W
(1 -
W
i)
:r:
t
,1
t

W
t1
c
W
C11
t
,
whoio -
W
is lho olaslicily of suLslilulion Lolwoon oiloionl lypos of laLoui soivicos, i is lho invoiso
of lho Fiisch olaslicily of laLoui supply ano :r:
t
is lho maiginal ialo of suLslilulion Lolwoon
consumplion ano laLoui. 1ho paiamoloi c
W
allows lo consiooi no wago inooxalion (c
W
=0) as in
lho slanoaio Calvo moool oi full wago inooxalion (c
W
= 1).
Finally, monolaiy policy is conoucloo Ly moans of a 1ayloi iulo,
1
t
= j
1
1
t1
(1 j
1
)

1 j
1
C11
t
j
j
log (1j
t
,1j
t1
)
,
whoio 1
t
is lho nominal inloiosl ialo sol Ly lho LCL,

1 is ils sloaoy-slalo lovol, 1
C11
t
is Luio-
Aioa-wioo CII inlalion ano 1j
t
is Aioa-wioo GDI. 1ho woighl of Spain`s CII inlalion (
C11
t1
)
on Luio-Aioa CII inlalion oquals 10/, which coiiosponos ioughly lo Spain`s shaio of lho Luio
Aioa oconomy.
7.2 IaraneterIzatIon
7.2.1 CaIILratIon
Iogaioing lho caliLialion usoo, oil shaios in pioouclion foi oach socloi aio sol using infoimalion
fiom inpul-oulpul laLlos, as in Anoios ol al. (2006), foi Spain, Fianco, Goimany ano Ilaly, whoio
lho lalloi 8 counliios aio usoo as a pioxy foi LMU (oxcluoing Spain). As can Lo soon in 1aLlo 11,
socloial oil shaios in pioouclion aio similai in Lolh oconomios, allhough lhoy aio somowhal highoi
in Spain. 1ho olaslicily of suLslilulion Lolwoon oil ano valuo-aoooo is sol lo 0.2, in oiooi lo capluio
lho iolalivoly low suLslilulaLilily Lolwoon oil ano olhoi inpuls al Lusinoss cyclo fioquoncios. 1his
valuo is also usoo in Mooina ano Solo (200) ano Hunl (2006). 1ho shaio of oil in lho consumplion
Laskol in Spain ano lho ouio aioa is sol lo lho 2008 woighl in lho Haimonizoo Inoox of Consumoi
Iiicos of oil iolnoo piooucls (lianspoil fuols ano hoaling oil), as iopoiloo in soclion 8.
1aLlo 11. CaliLialoo paiamolois
Iaiamoloi Spain Iosl of LMU Dosciiplion
T
0.187 0.118 oil shaio in liaoaLlos pioouclion
.
0.006 0.008 oil shaio in non-liaoaLlos pioouclion
,
T
, ,
.
0.2 0.2 olaslicily of suLslilulion in lho pioouclion fcl.
.
ci|
0.062 0.0 oil shaio in lho consumplion Laskol
i 2 2 invoiso of laLoui supply olaslicily
-
W
4 4 olaslicily of suLsl. acioss laLoui vaiiolios
7.3 EstInatIon
1ho paiamolois which aio nol caliLialoo (shock paiamolois, Calvo ano inooxalion paiamolois,
haLil foimalion, invoslmonl aojuslmonl cosls ano 1ayloi iulo coomcionls) aio oslimaloo using
Layosian molhoos. Foimally, Layosian oslimalion consisls of lnoing lho paiamoloi vocloi lhal
maximizos lho piooucl of lho likolihooo funclion (which gaugos lho moool`s aLilily lo malch lho
oLsoivaLlos soiios foi givon paiamoloi valuos) ano lho oonsily of lho joinl piioi oisliiLulion of
lho oslimaloo paiamolois (lhoioLy giving moio woighl lo lhoso paiamoloi valuos lhal aio moio
plausiLlo accoioing lo lho iosoaichoi`s piiois). Ly inliooucing piiois in lho oslimalion piocoouio,
wo can oxploil non-samplo infoimalion iogaioing lho valuos of lho oslimaloo paiamolois, such as
micio-lovol oala on lho ouialion of nominal piicos ano nominal wagos.
1aLlo 12 conlains lho moans of lho piioi oisliiLulions assumoo in lho oslimalion.
8
1ho piioi
moans of lho Calvo piico paiamolois aio Lasoo on sluoios lhal omploy inoivioual piico oala lo
compulo fioquoncios of piico aojuslmonl [lvaioz ano Hoinanoo (2006) ano Dhyno ol al. (2006)[.
Spocilcally, wo consiooi lhal piico slickinoss in lho liaoaLlo socloi in Spain is similai lo lhal in lho
8
All paiamolois aio assumoo lo Lo inooponoonlly oisliiLuloo, such lhal lho joinl oonsily is simply lho piooucl of
inoivioual oonsilios. Iaiamolois aio assumoo lo Lo noimally oisliiLuloo, oxcopl foi Lounooo onos, which aio assumoo
lo Lo Lola oisliiLuloo.
ouio aioa ano consiooi a moan ouialion of 4 quailois, which implios 0
T
= 0.7.
4
Foi non-liaoaLlos,
lho ovioonco poinls lo highoi ouialions. Wo consiooi ouialions of quailois foi lho ouio aioa ano
6 quailois foi Spain, lo allow foi highoi piico slickinoss in Spain. Sluoios using suivoy oala on
wago solling piovioo a Lasis foi lho piioi moans of lho Calvo wago paiamolois ano lho oogioos of
inooxalion lo CII inlalion [ou Caju ol al. (2008), Diuanl ol al.(2008)[. In pailiculai, wo consiooi
lhal lho avoiago ouialion of a wago conliacl is 4 quailois in Lolh aioas ano, as oiscussoo in soclion
, Spain has a consiooiaLly highoi oogioo of wago inooxalion. Foi wago inooxalion, wo chooso
valuos of 0.7 ano 0.2 foi Spain ano LMU, iospoclivoly, iolocling lho moio wioospioao uso of
inooxalion clausos in colloclivo wago agioomonls in Spain.
1aLlo 12. Iiioi moans foi lho oslimaloo paiamolois
Iaiamoloi Spain Iosl of LMU DisliiLulion Dosciiplion
0
T
0.7 0.7 Lola Calvo paiamoloi, liaoaLlos
0
.
0.88 0.80 Lola Calvo paiamoloi, non-liaoaLlos
0
W
0.7 0.7 Lola Calvo paiamoloi, wagos
c
T
0.80 0.80 Lola inooxalion, liaoaLlos
c
.
0.40 0.40 Lola inooxalion, non-liaoaLlos
c
W
0.7 0.2 Lola inooxalion, wagos
0.70 0.70 Lola haLil foimalion paiamoloi
1 4.00 4.00 Noimal convoxily invoslmonl aojuslmonl cosls
j
1.0 Noimal 1ayloi iulo, inlalion

j
j
0.0 Noimal 1ayloi iulo, oulpul giowlh
j
1
0.00 Noimal 1ayloi iulo, laggoo inloiosl ialo
1ho moool is oslimaloo using quailoily oala foi Spain ano LMU on yoai-on-yoai CII inlalion,
giowlh ialos of ioal GDI, ioal piivalo consumplion, ioal piivalo invoslmonl, omploymonl in lho
liaoaLlo ano non-liaoaLlo soclois, ioal wagos ano lolal ioal oxpoils, as woll as ouio nominal inloiosl
ialos ano oollai nominal inloiosl ialos (as a pioxy foi woilo nominal inloiosl ialos). Oui samplo
poiioo is 1007:Q1-2007:Q4. 1aLlo 18 conlains lho posloiioi oslimalos of lhoso paiamolois lhal aio
iolovanl foi oui suLsoquonl analysis. 1ho oslimalos aio faiily piociso, wilh a fow oxcoplions (such
as invoslmonl aojuslmonl cosls). Ly compaiing lho paiamoloi oslimalos wilh lhoii piiois in 1aLlo
12, wo can soo lhal lho samplo infoimalion sooms lo conlim lho piioi insighl fiom micio sluoios
lhal liaoaLlo piicos aio moio loxiLlo lhan non-liaoaLlo piicos (0
T
< 0
.
). On lho olhoi hano,
aggiogalo oala suggosls lhal piico inooxalion in Lolh pioouclion soclois is somowhal lowoi lhan
whal micio sluoios inoicalo. 1ho posloiioi oslimalo of lho wago inooxalion paiamoloi coincioos
wilh ils piioi moan, inoicaling a sliong inluonco of lho piioi oisliiLulion on lho posloiioi ono.
Invoslmonl aojuslmonl cosls aio oslimaloo lo Lo highoi in LMU, suggosling lhal invoslmonl is loss
4
In lho Calvo moool, lho moan ouialion of piicowago conliacls () is givon Ly = 1(1 ), whoio is lho
conslanl pioLaLilily of piicowago aojuslmonl. 1his implios = 1 1.
Whon compaiing lho piioi ano posloiioi oisliiLulions of lho wago inooxalion paiamoloi (nol shown hoio), wo
lno lhal lho lalloi is viilually on lop of lho foimoi, which suggosls lhal oui aggiogalo oala sol ooos nol conlain
much infoimalion aLoul lhis paiamoloi.
volalilo in LMU, Lul lhis pioLaLly iolocls an aggiogalion olocl. Finally, oslimalos of lho 1ayloi
iulo coomcionls luin oul lo Lo quilo closo lo lhoii piioi moans.
1aLlo 18. Iosloiioi paiamoloi oslimalos
Iaiamoloi Spain Iosl of LMU Dosciiplion
0
T
0.60 0.88 Calvo paiamoloi, liaoaLlos
(0.0) (0.08)
0
.
0.01 0.04 Calvo paiamoloi, non-liaoaLlos
(0.08) (0.01)
0
W
0.64 0.60 Calvo paiamoloi, wagos
(0.07) (0.0)
c
T
0.10 0.10 inooxalion, liaoaLlos
(0.08) (0.18)
c
.
0.81 0.82 inooxalion, non-liaoaLlos
(0.16) (0.16)
c
W
0.7 0.1 inooxalion, wagos
(0.18) (0.18)
0.4 0.4 haLil foimalion paiamoloi
(0.07) (0.07)
1 0.08 2.70 convoxily invoslmonl aojuslmonl cosls
(0.40) (1.1)
j
1.88 (0.14) 1ayloi iulo, inlalion

j
j
0.48 (0.12) 1ayloi iulo, oulpul giowlh
j
1
0.70 (0.08) 1ayloi iulo, laggoo inloiosl ialo
Nolo: slanoaio oiiois of paiamoloi oslimalos in paionlhosis
7.4 TLe eects oI an oII rIce sLock
Wo now simulalo how lho Spanish oconomy ano lho iosl of LMU iospono lo an oil piico shock in
lho oslimaloo moool. 1ho sizo of lho shock is choson as follows. Oui inlonlion in lhis oxoiciso is lo
simulalo lho olocls of a iiso in lho oollai piico of ciuoo oil of 10/. In ils cuiionl voision, LLMOD
aLsliacls fiom impoifocl pass-lhiough of ciuoo oil piicos lo lho consumoi piicos foi iolnoo oil
piooucls paio Ly housoholos. As oiscussoo in soclion 8, a iiso in ciuoo oil piicos of 10/ has an
impacl of 2.1/ on lho onoigy compononl of Spanish CII inlalion, so wo now simulalo lho iosponso
of lho Spanish ano LMU oconomios lo a shock of lhis sizo. Wo assumo lhal lhis pailiculai shock
is voiy poisislonl, Ly solling ils aulocoiiolalion coomcionl lo 0.0, which implios a half-lifo of 18.
quailois foi lho shock.
6
6
1ho half-lifo of a shock lo an AI(1) piocoss is oolnoo as lho numLoi of poiioos lhal musl olapso unlil lho piocoss
ioluins lo ono half of ils impacl valuo. Lolling oonolo lho aulocoiiolalion coomcionl of lho AI(1) piocoss, lho
half-lifo of lho shock is givon Ly log(0) log().
Figuio plols lho impulso iosponsos in Spain ano lho iosl of LMU. 1ho fall in oil piicos Liings
aLoul a iiso in inlalion, as moasuioo Ly lho Haimonizoo Inoox of Consumoi Iiicos (HICI). 1his
lakos placo Lolh lhiough a oiiocl olocl, via iolnoo oil piooucls in lho consumplion Laskol, ano
an inoiiocl olocl, via lho incioaso in lho piico of lho oil inpul, which is usoo in lho pioouclion of
liaoaLlos ano non-liaoaLlos. Nolico lhal piooucoi piicos, as moasuioo Ly lho GDI oolaloi, iiso
fasloi in Spain lhan in LMU, ouo lo a gioaloi woighl of oil Lolh in liaoaLlos ano non-liaoaLlos.
1his, logolhoi wilh a gioaloi woighl of oil oxponoiluios in lho consumplion Laskol, piooucos a laigoi
iiso in Spanish inlalion.
7
1ho incioaso in HICI inlalion in lho ouio aioa loaos lho Luiosyslom lo
iaiso nominal inloiosl ialos. 1his oopiossos consumplion ano invoslmonl giowlh in LMU. In Spain,
consumplion oiops Ly a similai amounl, whoioas piivalo invoslmonl oxpoiioncos a somowhal laigoi
oiop. Ovoiall, Spanish GDI giowlh falls Ly moio lhan in LMU, an olocl which is ioinfoicoo Ly
lho facl lhal Spanish oxpoils aio moio ooponoonl on oomoslic oomano in lho iosl of LMU lhan
vicovoisa. In Lolh iogions, omploymonl falls as a iosull of woakoi oomano. Nolico howovoi lhal
lho olocls on GDI ano omploymonl giowlh aio ialhoi small.
Figuio . Impulso iosponsos lo an oil piico shock, Lasolino moool
0 5 10 15 20
0
0.05
0.1
0.15
0.2
GDP deflator
Spain
rest of EMU
0 5 10 15 20
0
0.1
0.2
0.3
0.4
HICP
0 5 10 15 20
0.02
0.04
0.06
0.08
0.1
nominal interest rate
0 5 10 15 20
-0.02
0
0.02
0.04
0.06
real interest rate
0 5 10 15 20
-0.3
-0.2
-0.1
0
0.1
private consumption
0 5 10 15 20
-1
-0.5
0
0.5
private investment
0 5 10 15 20
-0.3
-0.2
-0.1
0
0.1
GDP
0 5 10 15 20
-0.2
-0.1
0
0.1
0.2
employment
0 5 10 15 20
-0.1
-0.05
0
0.05
0.1
nominal wages
All vaiiaLlos in yoai-on-yoai giowlh ialos (/), oxcopl nominal inloiosl ialo in annual loims.
1aLlo 14 compaios lho olocls of lho shock on Spanish yoai-on-yoai CII inlalion ano GDI
giowlh in M1LL (lho quailoily maciooconomic moool piosonloo in soclion 6) ano in LLMOD.
7
Whon oocomposing lho iosponso of HICI inlalion inlo a oiiocl olocl ano an inoiiocl olocl, wo lno lhal lho
oiiocl olocl oominalos in lho lisl yoai afloi lho shock (0.18/ vs. 0.07/ on avoiago), Lul lho inoiiocl olocl oominalos
afloiwaios, ouo lo ils gioaloi poisislonco.
As can Lo soon, lho olocls on CII inlalion aio Lioaoly similai in Lolh moools, allhough lhoy
aio somowhal smalloi in LLMOD (ospocially in lho socono yoai afloi lho shock). Iogaioing GDI
giowlh, Lolh moools piooicl a oiloionl aojuslmonl palloin, wilh a oolayoo iosponso in M1LL
ano a moio immooialo iosponso in LLMOD. 1his oiloionco is laigoly ouo lo lho foiwaio-looking
naluio of oxponoiluio oocisions in LLMOD, as opposoo lo lho puioly Lackwaio-looking sliucluio
in M1LL.
1aLlo 14. Llocls of a 10/ iiso in oil piicos in M1LL ano LLMOD
8
yoy CII inlalion yoy GDI giowlh
Yoai 1 Yoai 2 Yoai 1 Yoai 2
M1LL 0.2 0.18 0.01 -0.22
LLMOD 0.20 0.04 -0.20 -0.04
Nolo: annual avoiagos of quailoily valuos, in /
1hoso Lasolino iosulls havo lo Lo inloipioloo wilh caio. Fiisl, oui analysis assumos lhal lho
incioaso in govoinmonl lax iovonuo ouo lo lho oil piico incioaso has no olocl on oquiliLiium oy-
namics. 1o lho oxlonl lhal lax winofalls alocls lho govoinmonl`s lscal policy ano housoholos aio
non-Iicaioian, oui quanlilalivo iosulls may Lo alocloo somowhal. Socono, oui oxogonous lioal-
monl of lho iosl of lho woilo implios, inloi alia, lhal wo oo nol consiooi lho conliaclionaiy impacl
in ioal aclivily in lho iosl of lho woilo non-oil piooucing counliios ano also ignoio lho olocls of
lho oil winofall on sponoing oocisions of oil-piooucing counliios.
7.4.1 Second-round eects Iron vage IndexatIon
Spain`s iolalivoly high oogioo of wago inooxalion may hinooi lho nocossaiy aojuslmonl of wagos in
iosponso lo shocks ano lhus havo oamaging consoquoncos foi oulpul ano omploymonl. Fuilhoimoio,
lo lho oxlonl lhal wagos aio linkoo lo CII inlalion, lho iiso in lho lalloi piooucoo foi inslanco Ly
an oil shock is Louno lo iaiso laLoui ano non-laLoui pioouclion cosls foi lims, wilh lho iosulling
socono-iouno olocls on CII inlalion.
In oiooi lo isolalo lho olocl of wago inooxalion on lho Spanish oconomy, wo now poifoim a
socono oxoiciso in which wo simulalo lho samo oil piico shock unooi lho assumplion lhal wago
inooxalion is zoio Lolh in Spain ano lho iosl of LMU. 1ho Lasolino caliLialion iomains unchangoo
olhoiwiso. Figuio 6 compaios lho iosponsos of Spanish vaiiaLlos in lhis counloi-faclual sconaiio
wilh lhoso in lho Lasolino moool. As oxpocloo, Lolh GDI oolaloi inlalion ano CII inlalion
incioaso lo a lossoi oxlonl in lho counloi-faclual sconaiio, lhanks lo lho aLsonco of socono-iouno
olocls. 1ho samo can Lo saio aLoul lho iosponso of GDI giowlh. 1ho main oiloionco Lolwoon Lolh
sconaiios is in lho iosponso of nominal wago inlalion. In lho aLsonco of wago inooxalion, nominal
wago giowlh falls ouo lo woakoi laLoi oomano. Nolico lhal omploymonl giowlh is noaily ioonlical
8
Nolo lhal lhoso simulalions aio nol complololy homogonous, as lho M1LL shock is poimanonl, whilo such a
shock cannol Lo implomonloo in LLMOD. If wo mooify lho M1LL shock lo follow lho palh of lho ono applioo lo
LLMOD, lho olocl on CII inlalion is 0.24 poiconlago poinls in lho lisl yoai ano 0.00 in lho socono yoai, whilo lho
olocl on GDI giowlh in lho socono yoai Locomos -0.20 poiconlago poinls.
in Lolh sconaiios, ouo lo lho facl lhal omploymonl is laigoly oomano-ooloiminoo in LLMOD ano
lho facl lhal lho GDI iosponso is viilually lho samo. Howovoi, lhoso quanlilalivo iosulls havo lo
Lo inloipioloo wilh caio, among olhoi ioasons Locauso inooxalion ano wago solling aio mooolloo
in LLMOD using slanoaio spocilcalions which coulo Lo impiovoo along lho following linos: lisl,
wagos in lho moool aio inooxoo lo lho quailoi on quailoi inlalion ialo of lho piovious quailoi,
whoioas in Spain wago conliacls aio inooxoo lo lho yoai-on-yoai inlalion ialo of DocomLoi of lho
piovious yoai, which woulo imply longoi inoilia; socono, wagos aio assumoo lo Lo sol ) Calvo,
insloao of having a pioooloiminoo ouialion oslaLlishoo in lho wago conliacl, as is lypically lho
caso. Wo loavo lhoso mooilcalions foi fuluio iosoaich.
Figuio 6. Impulso iosponsos lo an oil piico shock, Lasolino moool vs. no wago inooxalion
0 5 10 15 20
0
0.05
0.1
0.15
0.2
GDP deflator
baseline model
no wage indexation
0 5 10 15 20
0
0.1
0.2
0.3
0.4
HICP
0 5 10 15 20
0.02
0.04
0.06
0.08
0.1
0 5 10 15 20
-0.02
0
0.02
0.04
real interest rate
0 5 10 15 20
-0.3
-0.2
-0.1
0
0.1
private consumption
0 5 10 15 20
-1
-0.5
0
0.5
private investment
0 5 10 15 20
-0.3
-0.2
-0.1
0
0.1
GDP
0 5 10 15 20
-0.2
-0.1
0
0.1
0.2
employment
0 5 10 15 20
-0.1
-0.05
0
0.05
0.1
nominal wages
7.4.2 Core InatIon targetIng
A mainlainoo assumplion in oui piovious lwo oxoicisos is lhal lho Luiosyslom laigols hoaolino
consumoi piico inlalion, consislonlly wilh ils manoalo of kooping lhis moasuio of piico slaLilily
Lolow Lul closo lo 2/. As omphasizoo Ly a numLoi of aulhois [o.g. Aoki (2001)[, lhoio aio gooo
ioasons why conlial Lanks shoulo laigol coio inlalion, which oxcluoos incioasos in lho piico of
oil. In pailiculai, lo lho oxlonl lhal oil piicos aio nol suLjocl lo nominal iigioilios, Lul lho olhoi
compononls of lho consumplion Laskol aio (which sooms lo Lo lho ompiiically iolovanl caso), lhon
lho conlial Lank shoulo focus on lho slaLilizalion of lho coio piico inoox, ialhoi lhan lho ovoiall
inoox. Ly nol ioacling lo changos in such a volalilo vaiiaLlo as lho oil piico, lho conlial Lank can
also avoio unnocossaiy luclualions in ils policy insliumonl ano lho iosulling inslaLilily in oconomic
aclivily.
In oiooi lo isolalo lho impoilanco of lhis olocl, wo now poifoim a lhiio oxoiciso, which consisls
of simulaling lho oil piico shock unooi lho assumplion lhal il is coio inlalion lhal onlois lho
1ayloi iulo foi lho nominal inloiosl ialo
0
. Figuio 7 compaios lho impulso iosponsos in lhis counloi-
faclual sconaiio wilh lhoso in lho Lasolino moool. As oxpocloo, non-onoigy (oi coio) inlalion
ioacls loss lhan hoaolino CII inlalion in Lolh sconaiios. Unooi coio inlalion laigoling, lho olocl
of lho ooloiioialion in GDI giowlh on monolaiy policy counloiacls lho olocl of lho incioaso in
coio inlalion, such lhal nominal inloiosl ialos aclually iomain noaily conslanl. As a iosull, ioal
inloiosl ialos oiop in lho counloifaclual sconaiio. 1his has Lonolcial olocls on piivalo consumplion
ano piivalo invoslmonl in Lolh iogions ouiing lho lisl yoai afloi lho shock. As a iosull, lho fall
in GDI ano omploymonl in lho lisl yoai is also smalloi. Howovoi, lho quanlilalivo oiloioncos
Lolwoon Lolh sconaiios aio again small.
Figuio 7. Impulso iosponsos lo an oil piico shock, Lasolino moool vs. coio inlalion laigoling
0 5 10 15 20
-0.1
0
0.1
0.2
0.3
non-energy CPI
baseline model
core inflation targeting
0 5 10 15 20
-0.1
0
0.1
0.2
0.3
HICP
0 5 10 15 20
-0.05
0
0.05
0.1
0.15
0 5 10 15 20
-0.1
-0.05
0
0.05
0.1
real interest rate
0 5 10 15 20
-0.3
-0.2
-0.1
0
0.1
private consumption
0 5 10 15 20
-1
-0.5
0
0.5
private investment
0 5 10 15 20
-0.3
-0.2
-0.1
0
0.1
GDP
0 5 10 15 20
-0.2
-0.1
0
0.1
0.2
employment
0 5 10 15 20
-0.1
-0.05
0
0.05
0.1
nominal wages
0
In lhis counloifaclual oxoiciso, lho coomcionls of lho 1ayloi iulo aio kopl al lhoii oslimaloo valuos, as lhoio is
no oLsovaLlo woilo in which lho LCL laigols coio inlalion, on which wo coulo oslimalo lhis now 1ayloi iulo. If wo
ignoio lho misspocilcalion ano oslimalo a coio-inlalion-laigolling 1ayloi iulo wilh lho availaLlo oLsoivoo oala in lho
conloxl of LLMOD, wo oLlain voiy similai paiamoloi valuos, wilh a jusl slighlly lowoi iosponso lo (coio) inlalion
ano a slighlly Liggoi iosponso lo oulpul.
8 ConcIusIons
Oil piico shocks of lho 1070s hao a maikoo inlalionaiy impacl, whon inlalion ioachoo lwo oigils
in inousliializoo oconomios ano closo lo 2/ in Spain, ano also a sizaLlo conliaclionaiy olocl on
oulpul ano omploymonl. Inlalion ano oulpul oovolopmonls in lho 21sl conluiy, lhough, soom lo
call inlo quoslion lho iolovanco allachoo lo oil piico changos as a signilcanl souico of maciooconomic
luclualions.
In facl, lhoio is a giowing Looy of ovioonco oocumonling lho loss of iolovanco of oil as a souico
of maciooconomic luclualions Lolh in inousliializoo ano omoiging oconomios. 1ho ovioonco wo
piosonl foi Spain shows lhal lho inlalionaiy impacl of oil piico changos is limiloo. A 10/ incioaso
in lho piico of oil incioasos consumoi piico inlalion in Spain Ly 0.20 pp lo 0.2 pp lho yoai of lho
shock ano an aooilional 0.04 pp lo 0.18 pp lho yoai afloi.
1ho oiiocl conliiLulion of changos in lho piicos of iolnoo oil piooucls on hoaolino consumoi
piico inlalion avoiagos 0.2 pp Lolh in Spain ano in lho ouio aioa. Howovoi, in lho lasl oocaoo
housoholo oxponoiluio in Spain ano in lho ouio aioa is swilching lo oil iolnoo piooucls, such
as lianspoil fuols, so lhal lho oiiocl inlalionaiy impacl of oil piico incioasos is iising ovoi limo.
SizaLlo luclualions in lho oil piico suggosls lhal lhoy aio an impoilanl oiivoi of inlalion vaiiaLilily.
In facl, oil piico changos accounl foi moio lhan 0/ of lho vaiianco of Spanish inlalion, a lguio
which is somowhal lowoi in lho ouio aioa, iolocling lho lowoi shaio of inoiiocl laxos in Spanish
iolail piicos.
Inoiiocl olocls on inlalion in Spain ano lho ouio aioa aio quilo limiloo foi lho oconomy as a
wholo, as is oxpocloo fiom lho low oil inlonsily of mosl inousliios, as shown Ly inpul-oulpul laLlos,
ano lho facl lhal onoigy cosls aio nol consiooioo Ly lim managois lo Lo a majoi oiivoi of piico
changos, as shown Ly suivoy oala. Ioconl yoais havo soon aovancos in oil omcioncy of pioouclion
piocossos, so lhoso inoiiocl olocls aio losing impoilanco.
1hoio is also ovioonco lhal liansiloiy inlalionaiy shocks havo a sliongoi impacl on Spanish
wagos lhan in lhoso of lho ouio aioa, iolocling Lolh lho naluial onoogonous iosponso ano lho facl
lhal inooxalion clausos aio wioospioao in Spain, in conliasl wilh lho ouio aioa. 1ho oslimaloo
magniluoo of lhis olocl is limiloo, lhough.
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Lanco oo Lspana (Lo.), Jh nnn|j. J h 5nn.h nnj, Lanco oo Lspana.
[2[ LVAILZ, L. J., ano I. HLINANDO (2006). Iiico Solling Lohavioui in Spain. Lvioonco
fiom consumoi piico micio-oala", 1nn. `J||.nj, 28, pp. 600-716.
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THE IMPACT OF OIL PRICE CHANGES

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' ' '

' ' '

' ' '

is lho Consumoi Iiico Inoox (CII), 1

1.0 Noimal 1ayloi iulo, inlalion

1.88 (0.14) 1ayloi iulo, inlalion

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