Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: Evidence from three Nordic Kingdoms

Muhammad Ali Nasir, Toan Huynh () and Larisa Yarovaya

International Review of Financial Analysis, 2020, vol. 72, issue C

Abstract: In the context of the debate on inflation targeting, this paper analyses the impact of the oil shocks on inflation expectations in three Nordic Kingdoms. A NARDL framework is applied to data from Jan 1994 to June 2018 on the Kingdoms of Norway, Sweden and Denmark. Our key findings suggest that there are considerable nonlinearities and asymmetries in the relationship between inflation expectations, oil shocks and economic determinants of inflation expectations. The expectations formulated in the past have a very significant negative impact on future inflation expectations (adaptive expectations) and there is heterogeneity in the adaptiveness pace. A country's net oil trade position seems to reflect on the impact of oil price shocks on the inflation expectations and there is asymmetry and downwards inflation expectations rigidity. There is strong evidence of exchange rate pass-through to inflation expectations. Prevailing regimes of price stability can support to anchor future inflation expectations. Reduction in fiscal deficit and increases in money supply has a positive impact while unemployment has a negative impact on inflation expectations. The cumulative multiplier analysis showed that the impact of oil shock was symmetric in Sweden and Denmark but asymmetric in Norway which is a large net oil exporter. Besides the adoption of explicit inflation targeting regime by Sweden and Norway, the inflation expectations in the underlying economies are prone to the oil price shocks and macroeconomic determinants. These shocks pose a whole set of challenges to monetary authorities in these economies and the findings in the subject treatise provide some guidance on how each shock may transmit.

Keywords: Inflation targeting; Zero lower bound; Oil shocks; Exchange rate pass-through; Inflation; Inflation expectations; Nonlinear ARDL; NKPC (search for similar items in EconPapers)
JEL-codes: D84 E24 E31 E43 E52 E58 E61 E62 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:72:y:2020:i:c:s1057521920302027

DOI: 10.1016/j.irfa.2020.101558

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