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The Effect of Oil Prices on Break-Even Inflation Rates of the United States (in Korean)

Author

Listed:
  • Jinyong Kim

    (Secretariat, The Bank of Korea)

  • Junecheol Kim

    (Reserve Management Group, The Bank of Korea)

  • Hyung Joon Lim

    (Gangneung Branch, The Bank of Korea)

Abstract

This article is an empirical study on the effect of changes in oil prices on break-even inflation rates (BEIs) of Treasury Inflation Protected Securities (TIPS) of the United States. The results of this analysis show that oil prices make a statistically significant effect on the BEIs with maturities of 2 year, 5 year, and 10 year. These sensitivities are salient in the BEIs with shorter maturities. These implies that the changes in oil prices can affect inflation expectations in the short term but this effect gets diminished to the extinction because inflation expectations depend on the inflation target of a monetary policy. Notably, the 5Y5Y BEI has a statistically significant relation with the changes in oil prices only when the slope of oil futures curve flattens and oil prices are falling. This observation reveals that financial market participants adjust their inflation expectations with confidence only in case of the simultaneous drop of the slope of oil futures curve and oil prices. Assuming the BEI is a reasonable estimator of inflation expectations extracted from financial market, oil prices make a limited impact on medium and long term inflation expectations (5Y5Y BEI). From these results we can make an inference that current movements of oil prices and financial market participants'expectation of oil price path make joint contribution to the formation of medium and long term inflation expectations.

Suggested Citation

  • Jinyong Kim & Junecheol Kim & Hyung Joon Lim, 2017. "The Effect of Oil Prices on Break-Even Inflation Rates of the United States (in Korean)," Working Papers 2017-10, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1710
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    More about this item

    Keywords

    Treasury inflation protected securities (TIPS); Break-even inflation rate; Inflation expectations; Oil prices;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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