Oil prices, policy uncertainty and asymmetries in inflation expectations

Khandokar Istiak and Md Rafayet Alam

Journal of Economic Studies, 2019, vol. 46, issue 2, 324-334

Abstract: Purpose - The purpose of this paper is to investigate the possible asymmetric response of inflation expectations to oil price and policy uncertainty shocks. Design/methodology/approach - The authors used the test of asymmetric impulse responses proposed by Kilian and Vigfusson (2011) to explore the issue of asymmetry. Findings - Unlike other studies that assume symmetric effects, this study finds asymmetric effects of oil price and policy uncertainty on inflation expectations for positive and negative shocks and for pre- and post-financial-crisis periods. In particular other things being same, a same magnitude oil price shock has greater effect on inflation expectations in post-crisis period than in pre-crisis period. Moreover, in post-crisis period a positive increasing oil price shock has greater effect on inflation expectations than a negative decreasing oil price shock. Practical implications - The paper concludes that FED’s greater focus on output stabilization since financial crisis has made inflation expectations less anchored and a sudden surge in oil price may quickly trigger inflation through inflation expectations. Originality/value - Exploring the issue of the possible asymmetric effects of oil price and economic policy uncertainty on inflation expectations is a relatively new topic (as other studies only assumed symmetry and did not investigate the possible asymmetry in this regard).

Keywords: Economic policy uncertainty; Inflation expectations; Oil prices; Asymmetry; E3; E5 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (32)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-02-2018-0074

DOI: 10.1108/JES-02-2018-0074

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