The time-varying effects of oil news on inflation

We investigate whether the effect of exogenous variations in oil prices on inflation has changed over time. We employ a Bayesian time-varying parameter vector autoregressive (TVP-VAR) model that identifies oil price shocks via a proxy variable. We first estimate a TVP version of Känzig (2021)’s VAR model where the proxy is constructed by summing surprise changes in daily oil futures prices around OPEC announcements. We find evidence that the dynamic response of oil production is non-negative for all points in the sample and the contemporaneous response of global economic activity is positive for some periods, casting doubt on the narrative that oil news captures expectations of future reductions in oil supply. We then compare the results with a Kilian (2024)-type TVP-VAR, which exhibits a higher reliability statistic and impulse response functions that indicate that OPEC news captures oil demand news. While this model captures a modest degree of time-variation in the inflation responses, especially in expansionary periods, its credible regions also accommodate time invariant responses.