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

29/11/2016 |  Sussman Nathan, zohar Osnat
All Press Releases In Subject:
Monetary Policy and Inflation


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.


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