Oil price dynamics and market-based inflation expectations
Shawkat Hammoudeh and
Juan Reboredo ()
Energy Economics, 2018, vol. 75, issue C, 484-491
We examine the link between oil prices and market-based inflation expectations in the United States. Using a Gaussian affine term structure model, we decompose the breakeven inflation into three components: the market-based inflation expectations, the inflation risk premium and the liquidity risk premium. We show that oil prices have a nonlinear impact on the 5- and 10-year market-based inflation expectation components. Specifically, we find that the impact of oil price changes on inflation expectations is more intense when oil prices are above a threshold of 67 USD per barrel and is more pervasive for the intermediate term than for the longer term. Furthermore, we show that oil prices have a nonlinear impact on the inflation risk premium. These results have implications for the management of inflation expectations.
Keywords: Inflation expectations; Inflation risk premium; Oil prices; Threshold (search for similar items in EconPapers)
JEL-codes: C22 D84 E31 Q43 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:75:y:2018:i:c:p:484-491
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