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

Nathan Sussman and Osnat Zohar

No 2016.13, Bank of Israel Working Papers from Bank of Israel

Abstract: Following the onset of the global financial crisis (2008) we witness a strengthening of the correlation between crude oil prices and medium-term inflation expectations. Using the first 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 five-year breakeven inflation rates react quite strongly to global ag- gregate demand conditions embedded in oil prices. One explanation for this finding is that in recent years monetary authorities put greater emphasis on macro-prudential issues. Alternatively, it may be that market participants perceive inflation targeting as either less aggressive when inflation deviates below target or less effective around the effective lower bound.

Keywords: Inflation targeting; inflation expectations; monetary policy; oil prices; anchoring; credibility (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E58 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2016-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Has inflation targeting become less credible? (2018)
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