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Inflation target and (a)symmetries in the oil price pass-through to inflation

Antonia Lòpez-Villavicencio () and Marc Pourroy ()
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Antonia Lòpez-Villavicencio: UL2 - Université Lumière - Lyon 2, GATE - Groupe d'analyse et de théorie économique - UL2 - Université Lumière - Lyon 2 - Ecole Normale Supérieure Lettres et Sciences Humaines - CNRS - Centre National de la Recherche Scientifique

Authors registered in the RePEc Author Service: Antonia López Villavicencio ()

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Abstract: In this paper we employ state-space models to estimate the pass-through of oil price changes to consumer prices for a large sample of countries from 1970 to 2017. By controlling for self-selection bias and endogeneity and allowing for different responses to positive and negative price changes, we asses the differences between explicit inflation targeting (IT) countries and a control group. Surprisingly perhaps, our results suggest that the pass-through is higher for IT countries. Our main contribution is to show that these is mainly due to IT countries having a significant higher pass-through than non-IT countries when the oil price decreases: a 10% drop in oil price leads about a 0.11% drop in inflation in ITers (of which 4pp are explained by the monetary regime). Importantly, we show that adopting IT reduces the asymmetry of the pass-through. We run several robustness checks and conclude that falling oil prices are more welcomed by the central banks with an IT framework, in particular during deflationary episodes or when inflation is above the target. JEL Classification: E31; E42; Q43.

Keywords: oil price; pass-through; inflation targeting; state-space model; propensity score matching (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ene and nep-mac
Date: 2019-05
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Published in Energy Economics, Elsevier, 2019, 80, pp.860-875. ⟨10.1016/j.eneco.2019.01.025⟩

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