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The Relationship Between Oil Prices and Inflation Compensation

Alejandro Perez-Segura and Robert Vigfusson ()

No 2016-04-06, IFDP Notes from Board of Governors of the Federal Reserve System (U.S.)

Abstract: In this note, we provide new empirical evidence supporting this conjecture that changes in the outlook for global economic activity explain the co-movement between oil prices and inflation compensation. In particular, we present an empirical strategy to identify changes in oil prices that are a response to economic activity (demand-induced) and changes in oil prices that are responding to oil-specific developments (supply-induced). Our main finding is that demand-induced oil price declines can explain most of the move in inflation compensation. As a consequence, economists would do well to pay less attention to oil prices and more attention to macroeconomic factors in explaining the decline in inflation compensation.

Date: 2016-04-06
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DOI: 10.17016/2573-2129.19

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