Energy Prices Impact on Inflationary Spiral
Round 1
Reviewer 1 Report
Dear Author/s,
Thank you for giving me the opportunity to read your paper. The paper “Energy prices impact on inflationary spiral? Evidence from a quasi‑ natural experiment in China” is interesting for journal readers. Kindly take note of the following specific comments to make it better.
#Abstract should have at least one sentence per each: context and background, motivation, hypothesis, methods, results, conclusions.
#The introduction should include problem context, literature review and the hypothesis based on the gap analysis of the previously published research.
#Literature: The authors use two paragraphs to describe powerfull the historical origin and variables based theory in recent years, The literature review should be more up to date.
#Regarding methodology,authors should open why did they choose that method, Why not others? should clearly explain your choose
#Also, need clear future recommendation/implementation in the context of uncertainty and COVID. Please visit also
- https://doi.org/10.1177/1354816619888346
- https://doi.org/10.1080/00036846.2019.1707475
Author Response
Dear Reviewer,
Thank you for your valuable comments. Based on your evaluation we made several changes in our paper in order to express clearly the research design, its place in existing literature, discussion results and conclusions. We believe that originality of our paper consists in quantifying estimates of impact of energy prices on headline inflation. An interesting conclusion has been confirmed regarding the electricity consumption structure, when larger share of renewable electricity sources proves to be associated with lower inflation. This is, we believe, our main contribution to the state of the art.
Based on your comments the study has undergone several improvements. The paper has been better founded with literature, hypothesis has been clarified and discussion has been deepened. We have incorporated your comments in the revised manuscript as attached.
We hope you will find our paper interesting for publication.
Author Response File: 
Author Response.docx
Reviewer 2 Report
To start with, the association between inflation and electricity prices, it is important to set a clear theoretical framework based on previous studies. A lack of a clear theoretical setting can raise concerns about the estimation results. Following earlier contribution, the relationship between inflation and electricity price has been expressed in the form of an open economy New-Keynesian Philips Curve (NKPC). Under the NKPC, inflation is explained by its past rate (to account for persistence), expectations inflation, economic growth, money supply (monetary drivers), exchange rate (open economy), and electricity prices. The economic theory and empirical evidence suggest that these factors are determinants of actual inflation. Overlooking these drivers while estimating the effects of electricity prices on inflation can lead to serious bias in the pass-through of electricity prices to inflation. The authors can revise their estimation model by following a rigourous specification based on the economic theory and following previous contributions.
The authors ignore both demand and supply shocks as possible determinants of inflation. In a recent contribution by https://www.sciencedirect.com/science/article/abs/pii/S2405851321000714 (The quantile dependence of the stock returns of “clean” and “dirty” firms on oil demand and supply shocks), the authors point out that energy demand and supply shocks have different impacts on the performance of firms. This can be a possible channel through which energy shocks can affect inflation. It would be interesting to disentangle both demand and supply shocks in their analysis to support or reject this argument. The discussion section can be improved by considering how energy demand and supply shocks can shape inflationary spiral based on the aforementioned recent contribution.
Author Response
Dear Reviewer,
Thank you for your valuable comments. Based on your evaluation we made several changes in our paper in order to express clearly the research design, its place in existing literature, discussion results and conclusions. We believe that originality of our paper consists in quantifying estimates of impact of energy prices on headline inflation. Our analysis has confirmed the electricity prices pass-through to inflation indicating an increasing role of electricity for European economies. An interesting conclusion has been confirmed regarding the electricity consumption structure, when larger share of renewable electricity sources proves to be associated with lower inflation. This is, we believe, our main contribution to the state of the art.
Based on your comments the study has undergone several improvements. The paper has been better founded with literature, hypothesis has been clarified and discussion has been deepened. We have incorporated your comments in the revised manuscript as attached.
We hope you will find our paper interesting for publication.
Author Response File: Author Response.docx
Reviewer 3 Report
First of all, I found your article very interesting, and the research question very relevant! It is a nice piece of work with an important focus from a wider perspective than macroeconomics as well.
Please find my comments below, I hope they could help to improve your paper further.
- I would suggest to only include references that you do use for your analysis, you have something to say about, or you think are relevant and important to build up and show the context of your research. I would suggest to only include those, where you can say at least a few sentences about the content or the information of which you thought the referencing is needed. For example, I think there is no need for 4 references in sentences like this: "Moreover, various types of gases are hazardous, including greenhouse gases and dust [46]; [47]; [48]; [49]. "
I am not sure how the typical reader of this journal looks like, but at some points I feel you are referencing things that are more or less common knowledge.
- "The paper's main aim is to examine the relationship between electricity prices and inflation (excluding the direct electricity contribution). "
If the relationship is strong, what does it mean? And if not?
The implicit impact of rising electricity prices on inflation is already
included in the consumption basket, through the price increase of certain products. So my question is, through what other ways electricity should be taken into account? Or you just suggest, that electricity price developments should be studied more carefully when we think of future inflation pathways?
-Turning from fossils to RES on its own is not something that increases electricity prices. On one hand this is because most of the renewable technologies (as it is stated in the paper as well) are now becoming cost competitive. But more importantly the wholesale electricity prices are decreased by renewable generators through the merit order effect
(this means the 0 marginal cost RES producers go into the most left part of the supply curve - merit order -, and as a result of that market clearing price decreases). So even if green technologies would be more expensive, this would be reflected in support needs (which could be recovered
in many different ways), not in the energy price component of electricity prices. So I would suggest to rewrite those parts where it seems the authors suggest that increasing energy prices are the results of the green transition.
(e.g. around line 407, but there are several other examples). Especially because later you also find evidence of the opposite.
- The merit order effect (more renewables in the system result in lower electricity prices) is a widely used and analysed phenomenon, I am sure there are plenty of papers that confirmed its existence empirically. It is a next step of course, that lower electricity prices lead to lower inflation as well, but I think your results are not suprising. So I might be cautious stating that your main contribution to the literature is the confirmation of this relationship (higher RES share leads to lower inflation).
- You use electricity price of the non-household consumers as independent variable. Is it with or without taxes and levies? It is important because of the
previous point (without taxes and levies: more RES means lower prices; with taxes and levies: more RES could mean higher prices because of support needs, that are recovered from taxes and levies mostly)
- How is that Hungary's prices are going down, while the prices in all other
countries are going up? It seems a mistake for me for the first look, if we talk
about non-household consumers. Please cross-check once more!
- I am not sure everything on Figure 4 and 5 is needed (they are not explained in detail anyways, but I would not suggest to do so, rather to leave out what is not relevant).
- I would suggest to leave out the dead-end approaches. E.g. what is included in Table 4. (I'm not sure about Table 5 either) This is part of the research, but I think there is no need to show every step, it is enough to show in detail the final model, that was chosen, and write down why and how you arrived to that, and why you think it is adequate to analyse
your research question, and what are the limitations. (e.g. annual granurality
had to be used instead of bi-annual, because of the availability of important variables, etc.).
Author Response
Dear reviewer,
thank you for your valuable comments. Please find attached how we have revised our paper according your comments.
Author Response File: Author Response.docx
Round 2
Reviewer 1 Report
My decission is ACCEPT
