Oil prices, policy uncertainty and asymmetries in inflation expectations
Abstract
Purpose
The purpose of this paper is to investigate the possible asymmetric response of inflation expectations to oil price and policy uncertainty shocks.
Design/methodology/approach
The authors used the test of asymmetric impulse responses proposed by Kilian and Vigfusson (2011) to explore the issue of asymmetry.
Findings
Unlike other studies that assume symmetric effects, this 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.
Practical implications
The paper concludes 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.
Originality/value
Exploring the issue of the possible asymmetric effects of oil price and economic policy uncertainty on inflation expectations is a relatively new topic (as other studies only assumed symmetry and did not investigate the possible asymmetry in this regard).
Keywords
Acknowledgements
The authors of this paper have not made the research data set openly available. Any enquiries regarding the data set can be directed to the corresponding author.
Citation
Istiak, K. and Alam, M.R. (2019), "Oil prices, policy uncertainty and asymmetries in inflation expectations", Journal of Economic Studies, Vol. 46 No. 2, pp. 324-334. https://doi.org/10.1108/JES-02-2018-0074
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited