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

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  • Sussman, Nathan
  • Zohar, Osnat

Abstract

Following the onset of the global ï¬ nancial crisis (2008) we witness a strengthening of the correlation between crude oil prices and medium-term inflation expectations. Using the ï¬ rst 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 ï¬ ve-year breakeven inflation rates react quite strongly to global aggregate demand conditions embedded in oil prices. The result suggests that market participants perceive inflation targeting as either less effective around the effective lower bound or less aggressive when inflation deviates below target. Alternatively, it may be that in recent years monetary authorities have additional considerations such as macro-prudential issues.

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  • Sussman, Nathan & Zohar, Osnat, 2016. "Has Inflation Targeting Become Less Credible? Oil Prices, Global Aggregate Demand and Inflation Expectations during the Globa," CEPR Discussion Papers 11535, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11535
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    2. Takuji Fueki & Jouchi Nakajima & Shinsuke Ohyama & Yoichiro Tamanyu, 2021. "Identifying oil price shocks and their consequences: The role of expectations in the crude oil market," International Finance, Wiley Blackwell, vol. 24(1), pages 53-76, April.
    3. Andrew Filardo & Jacopo Lombardi & Carlos Montoro, 2018. "Monetary policy spillovers, global commodity prices and cooperation," BIS Working Papers 696, Bank for International Settlements.

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    More about this item

    Keywords

    Inflation targeting; Inflation expectations; Credibility; Monetary policy; Oil prices; Anchoring;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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