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Inflation Expectations and How it Explains the Inflationary Impact of Oil Price Shocks: Evidence from the Michigan Survey

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  • Benjamin Wong

Abstract

Analysis of the Michigan Survey data confirms U.S. inflation expectations are not perfectly anchored in the event of an oil price shock. Two key results emerge through counterfactual analysis. First, better anchoring of inflation expectations can ameliorate the mild inflation impact which occurs 10 to 12 months after an oil price shock. Second, an initial large burst of inflation from an oil price shock always occurs regardless whether inflation expectations are anchored or not. Therefore, while better anchoring of inflation expectations can lead to better inflation outcomes, these gains can be limited.

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File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-06/45_2014_wong.pdf
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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2014-45.

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Length: 27 pages
Date of creation: Jun 2014
Date of revision:
Handle: RePEc:een:camaaa:2014-45

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Keywords: Oil price shocks; Michigan Survey; Inflation expectations;

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  1. Kilian, Lutz & Lewis, Logan, 2009. "Does the Fed Respond to Oil Price Shocks?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7594, C.E.P.R. Discussion Papers.
  2. Goncalves, Silvia & Kilian, Lutz, 2004. "Bootstrapping autoregressions with conditional heteroskedasticity of unknown form," Journal of Econometrics, Elsevier, Elsevier, vol. 123(1), pages 89-120, November.
  3. Arora, Vipin & Gomis-Porqueras, Pedro & Shi, Shuping, 2013. "The divergence between core and headline inflation: Implications for consumers’ inflation expectations," Journal of Macroeconomics, Elsevier, Elsevier, vol. 38(PB), pages 497-504.
  4. Edelstein, Paul & Kilian, Lutz, 2009. "How sensitive are consumer expenditures to retail energy prices?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(6), pages 766-779, September.
  5. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 120(1), pages 116 - 159.
  6. Gert Peersman & Christiane Baumeister, 2009. "Time-Varying Effects of Oil Supply Shocks on the US Economy," 2009 Meeting Papers, Society for Economic Dynamics 171, Society for Economic Dynamics.
  7. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5994, C.E.P.R. Discussion Papers.
  8. Christiane Baumeister & Gert Peersman, 2013. "The Role Of Time‐Varying Price Elasticities In Accounting For Volatility Changes In The Crude Oil Market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(7), pages 1087-1109, November.
  9. Benjamin Wong, 2013. "Inflation Dynamics and The Role of Oil Shocks: How Different Were the 1970s?," CAMA Working Papers 2013-59, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  10. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, Elsevier, vol. 113(2), pages 363-398, April.
  11. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 425-436, March.
  12. Lutz Kilian & Robert J. Vigfusson, 2011. "Are the responses of the U.S. economy asymmetric in energy price increases and decreases?," Quantitative Economics, Econometric Society, Econometric Society, vol. 2(3), pages 419-453, November.
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