1. Thelowercostofproductionacrossawholerangeofenergyintensivegoodsmaybepassedonto consumersandhence,indirectly,reduceinflation(BlanchardandGal�2008).Thelowercostofproduction canalsotranslateinhigherinvestment.Onthedemandside,byreducingenergybills,adeclineinoilprices raisesconsumers'realincomeandleadstoanincreaseinconsumption;Annex1.ImpactofOilPricesonActivityandInflation:ABriefSurvey Largemovementsinoilpriceshavehistoricallybeenfollowedbysharpfluctuationsinactivityandinflation inmanycountries. 19 Thisbasicobservationhasledtoavoluminousliteratureanalyzingthecomplex linkagesbetweenmovementsinoilpricesandactivityandinflation.Thisboxpresentsabriefreviewofthe literaturetoaddressthefollowingquestions: Whichkeychannelstransmitchangesinoilpricestoactivityandinflation? Howlargeistheimpactofoilpricemovementsonactivity? Howlargeisthepassthroughofchangesinoilpricestoinflation? Whichkeychannelstransmitoilpricechangestoactivityandinflation? Fallingoilpricesoftenaffectactivityandinflationbyshiftingaggregatedemandandsupplyandtriggering policyresponses.Onthesupplyside,loweroilpricesleadtoadeclineinthecostofproduction(Finn2000),2014
2. Loweroilpricescanalsoleadtoadjustmentsinfiscalpoliciesthatcan inturnaffectactivity. Howlargeistheimpactofoilpricemovementsonactivity? Theliteraturemostlyfocusesonestimatingtheimpactofoilpriceincreasesonrealactivityinmajor economies. 22 Theseestimatesvarywidely,dependingontheoilintensityoftheeconomy,oil exporter/importerstatus,datasamples,andmethodology(AnnexTable1).Forexample,forOECDcountries,a 10percentincreaseinoilpriceshasbeenassociatedwithadeclineinrealactivityof0;Iffallingoilpriceseaseinflation-especially,coreinflationorinflationexpectations(Alvarezetal.2011)-centralbanksmayrespondwithmonetarylooseningwhich,inturn,canboostactivity(Bernanke