Has Inflation Targeting Become Less Credible? Oil Prices, Global Aggregate Demand and Inflation Expectations during the Globa

Nathan Sussman and Osnat Zohar

No 11535, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Following the onset of the global ï¬ nancial crisis (2008) we witness a strengthening of the correlation between crude oil prices and medium-term inflation expectations. Using the ï¬ rst principal component of commodity prices as a measure for global aggregate demand, we decompose oil prices into a global demand factor and idiosyncratic factors that include supply side effects and weather conditions. The decomposition of oil prices allows us to show that since the crisis, global ï¬ ve-year breakeven inflation rates react quite strongly to global aggregate demand conditions embedded in oil prices. The result suggests that market participants perceive inflation targeting as either less effective around the effective lower bound or less aggressive when inflation deviates below target. Alternatively, it may be that in recent years monetary authorities have additional considerations such as macro-prudential issues.

Keywords: Inflation targeting; Inflation expectations; Credibility; Monetary policy; Oil prices; Anchoring (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E58 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-ene, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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