Oil Prices Uncertainty, Endogenous Regime Switching, and Inflation Anchoring

Yoosoon Chang (), Ana María Herrera and Elena Pesavento ()
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Elena Pesavento: Emory University

CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: Using a novel approach to model regime switching with dynamic feedback and interactions, we extract latent mean and volatility factors in oil price changes. We illustrate how the volatility factor constitutes a useful measure of oil market risk (or oil price uncertainty) for policy makers and analysts as it captures uncertainty not reflected in other economic/financial uncertainty measures. Then, in the context of a VAR, we investigate the role of oil price uncertainty in driving inflation expectations and inflation anchoring. We show that shocks to the mean factor lead to higher expected inflation and inflation disagreement among professional forecasters and households. In contrast, shocks to the volatility factor act as aggregate demand shocks in that they result in lower expected inflation, yet they do increase disagreement about future inflation among professional forecasters and, especially, among households. We also provide econometric evidence suggesting the proposed endogenous volatility switching model can outperform other regime switching models.

Keywords: oil price volatility; endogenous regime switching; expected inflation; inflation anchoring (search for similar items in EconPapers)
Pages: 43 pages
Date: 2023-02
New Economics Papers: this item is included in nep-ene, nep-mon and nep-rmg
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Citations: View citations in EconPapers (2)

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https://caepr.indiana.edu/RePEc/inu/caeprp/caepr2023-002.pdf (application/pdf)

Related works:
Journal Article: Oil prices uncertainty, endogenous regime switching, and inflation anchoring (2023)
Working Paper: Oil Prices Uncertainty, Endogenous Regime Switching, and Inflation Anchoring (2023)
Working Paper: Oil Prices Uncertainty, Endogenous Regime Switching, and Inflation Anchoring (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:inu:caeprp:2023002

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