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Inflation target and (a)symmetries in the oil price pass-through to inflation

Author

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  • Antonia López-Villavicencio

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne - EM - EMLyon Business School - CNRS - Centre National de la Recherche Scientifique)

  • Marc Pourroy

    (LéP [Poitiers] - Laboratoire d'économie de Poitiers [UR 13822] - UP - Université de Poitiers = University of Poitiers)

Abstract

In this paper we employ state-space models to estimate the pass-through of oil price changes to consumer prices for a large sample of countries from 1970 to 2017. By controlling for self-selection bias and endogeneity and allowing for different responses to positive and negative price changes, we asses the differences between explicit inflation targeting (IT) countries and a control group. Surprisingly perhaps, our results suggest that the pass-through is higher for IT countries. Our main contribution is to show that these is mainly due to IT countries having a significant higher pass-through than non-IT countries when the oil price decreases: a 10% drop in oil price leads about a 0.11% drop in inflation in ITers (of which 4pp are explained by the monetary regime). Importantly, we show that adopting IT reduces the asymmetry of the pass-through. We run several robustness checks and conclude that falling oil prices are more welcomed by the central banks with an IT framework, in particular during deflationary episodes or when inflation is above the target.

Suggested Citation

  • Antonia López-Villavicencio & Marc Pourroy, 2019. "Inflation target and (a)symmetries in the oil price pass-through to inflation," Post-Print hal-05455916, HAL.
    • Handle: RePEc:hal:journl:hal-05455916
    DOI: 10.1016/j.eneco.2019.01.025
    Note: View the original document on HAL open archive server: https://hal.science/hal-05455916v1
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