Economics and Finance Faculty Publications

Oil price shocks and interest rates in major economies

Document Type

Article

Publication Date

1-2026

Abstract

We investigate in this paper the effects of oil price shocks on exchange rate pass-through (ERPT), inflation, and interest rates. We use a global vector autoregressive (GVAR) model with 30 economies (11 major economies plus 19 economies within the Eurozone), monthly data from 1999M4 to 2022M2, and time-varying bilateral trade. We examine generalized impulse response functions (GIRF) of West Texas Intermediate (WTI) shocks under two identification schemes: feedback effects with oil and exogenous oil. In the commodity currencies of Canada, Norway and South Africa, interest rates move positively in response to oil price shocks. In the U.S., the response is considerably higher. Russia is the exception with interest rates falling after oil price shocks. Our results remain robust across various alternative specifications, including structural vector autoregressive (SVAR) with reasonable causal ordering. Our model captures the direct effects of oil price shocks on inflation and indirect effects through pass-through mechanisms.

Comments

https://rdcu.be/e3xGY

Publication Title

International Economics and Economic Policy

DOI

10.1007/s10368-025-00709-0

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