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

Nathan Sussman () and Osnat Zohar ()
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Osnat Zohar: Bank of Israel

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: E52 E58 E31 E32 (search for similar items in EconPapers)
Date: 2016-11
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Related works:
Working Paper: Has inflation targeting become less credible? (2018) Downloads
Working Paper: Has Inflation Targeting Become Less Credible? Oil Prices, Global Aggregate Demand and Inflation Expectations during the Global Financial Crisis (2016) Downloads
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