European Central Bank

This paper shows that oil price shocks lead to a fall in industrial production and higher inflation using quarterly data for Japan over the period 1976:I – 2008:II. We find evidence of non-linear effects of oil prices on both industrial output and inflation. Our modelling strategy incorporates information about structural breaks in the variables included to represent the macroeconomic transmission channels. Historical decompositions reveal that oil shocks contributed to both lowering industrial activity and raising inflation in the late 1970s and early 1980s. In more recent episodes of oil price increases, inflationary effects are little visible and there is very limited evidence of oil-induced industrial slowdowns