Greenflation or Greensulation? The Case of Fuel Excise Taxes and Oil Price Pass-through
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Summary:
Can a carbon tax reduce inflation volatility? Focusing on fuel excise taxes, this paper provides systematic evidence on their role as a shock absorber that helps mitigating the impact of global oil price shocks on domestic inflation. Exploiting substantial variation in fuel tax rates across 28 OECD countries over the period from 2014 to 2021, a simple idea that a per-unit, specific tax takes up a portion of the product price immune to cost shocks goes a long way toward explaining heterogeneity in the degree of oil price pass-through into domestic inflation across countries. A back-of-the-envelope calculation from the estimation results supports its quantitative significance---differences in fuel tax rates could explain about 30% of the variation in annual headline CPI inflation rates observed between the U.S. and U.K. during the 2021 inflation surge.
Series:
Working Paper No. 2024/153
Subject:
Excises Fuel prices Fuel tax Inflation Oil prices Prices Taxes
Frequency:
regular
English
Publication Date:
July 12, 2024
ISBN/ISSN:
9798400280993/1018-5941
Stock No:
WPIEA2024153
Format:
Paper
Pages:
36
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