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Commodity Prices and Inflation Expectations in the United States

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Author Info

  • Oya Celasun
  • Lev Ratnovski
  • Roxana Mihet

Abstract

U.S. monetary policy can remain extraordinarily accommodative only if longer-term inflation expectations stay well-anchored, including in response to commodity price shocks. We find that oil price shocks have a statistically significant, but economically small impact on longer-term inflation compensation embedded in U.S. Treasury bonds. The estimated effect is larger for the post-crisis period, and robust to controlling for measures of liquidity risk premia. Oil price shocks are also correlated with the variance of longer-term inflation expectations in the University of Michigan Survey of Consumers in the post-crisis period. These results are not attributable to looser monetary policy - oil price increases were associated with expectations of a faster monetary tightening after the crisis. Overall, the findings are consistent with some impact of commodity prices on long-term inflation expectations and/or on inflation rate risk.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/89.

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Length: 25
Date of creation: 01 Mar 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/89

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Related research

Keywords: Commodity prices; Agricultural prices; External shocks; Oil prices; Price increases; inflation; monetary policy; inflation rate; aggregate demand; treasury bonds; post-crisis period; nominal interest rates; price inflation; monetary fund; monetary economics; lower aggregate demand; inflation rates; inflation data; expectations of inflation; changes in prices; long-term interest rates; actual inflation; inflation dynamics; forecasting inflation; price level; post-crisis recovery; rising inflation; inflation target; inflation targeting;

This paper has been announced in the following NEP Reports:

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  1. Kilian, Lutz, 2007. "The Economic Effects of Energy Price Shocks," CEPR Discussion Papers 6559, C.E.P.R. Discussion Papers.
  2. Olivier Armantier & Wändi Bruine de Bruin & Giorgio Topa & Wilbert van der Klaauw & Basit Zafar, 2011. "Inflation expectations and behavior: Do survey respondents act on their beliefs?," Staff Reports 509, Federal Reserve Bank of New York.
  3. Refet S. G�rkaynak & Brian Sack & Jonathan H. Wright, 2010. "The TIPS Yield Curve and Inflation Compensation," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 70-92, January.
  4. Petra Gerlach & Peter Hördahl & Richhild Moessner, 2011. "Inflation expectations and the great recession," BIS Quarterly Review, Bank for International Settlements, March.
  5. Keith Sill, 2007. "The macroeconomics of oil shocks," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 21-31.
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