Oil Prices, Policy Uncertainty and Asymmetries in Inflation Expectations
Journal of Economic Studies, Forthcoming
18 Pages Posted: 7 Feb 2019
Date Written: December 31, 2017
Abstract
We investigate the possible asymmetric response of inflation expectations to oil price and policy uncertainty shocks. Unlike other studies that assume symmetric effects, our study finds asymmetric effects of oil price and policy uncertainty on inflation expectations for positive and negative shocks, and for pre- and post-financial crisis periods. In particular, other things being same, a same-magnitude oil-price shock has greater effect on inflation expectations in post-crisis period than in pre-crisis period. Moreover, in post-crisis period a positive (increasing) oil-price shock has greater effect on inflation expectations than a negative (decreasing) oil price shock. We conclude that FED’s greater focus on output stabilization since financial crisis has made inflation expectations less anchored and a sudden surge in oil price may quickly trigger inflation through inflation expectations.
Keywords: Economic Policy Uncertainty, Asymmetry, Inflation Expectations, Oil Prices
JEL Classification: E3, E5
Suggested Citation: Suggested Citation