Estimation of the Price Elasticity of Oil

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23-11-2022
MAKRO

We estimate the oil price elasticity for import prices for the sectors present in MAKRO. We make use of a Kalman filter approach developed by Kastrup, Kronborg, and Stephensen (2022).

Abstract

We estimate the oil price elasticity for import prices for the sectors present in MAKRO. In line with MAKRO, we assume price stickiness in the dynamics of import prices in order to allow for short-run and long-run effects. In order to estimate the oil price elasticity, we make use of a Kalman filter approach developed by Kastrup, Kronborg, and Stephensen (2022). We estimate the oil price elasticity for the combined sectors in MAKRO to approximately 0.21. However, we find heterogeneity across sectors. Not surprisingly, import prices in the energy and extraction sectors have the highest oil price elasticity, while changes in oil prices appear to have a minor impact on import prices in the production and service sectors. These estimates are robust to a set of robustness tests, such as changing the time period and applying different estimation approaches.