Has inflation targeting become less credible?

New paper by by  Nathan Sussman and Osnat Zohar of BIS.

BIS has also adopted a new way to summarise its research papers:

Focus

Since the 2008 financial crisis, oil prices have become highly correlated with inflation expectations for the medium term. This occurred in several countries, implying a global phenomenon. To trace its origins, we decompose oil prices into two factors: one capturing global aggregate demand and the second capturing oil-specific elements. Our measure of global demand is based on the strong co-movement of commodity prices. The oil-specific elements include OPEC’s strategic behavior and shocks to oil demand caused by the weather. We use this decomposition to explain changes in global inflation expectations.

Contribution

Central bankers were concerned that the increased correlation between inflation expectations and oil prices might indicate an un-anchoring of expectations. If this were the case, the credibility of inflation targeting might be declining. We test for un-anchoring using a framework based on a global Phillips curve. This framework allows us to trace the origins of the change that occurred after the global crisis.

Findings

We find that global aggregate demand has affected inflation expectations more since the crisis than it did in the past. Meanwhile, the effect of oil-specific factors remained low and stable. Since oil prices convey information about aggregate demand, their correlation with expectations has increased. Does this change indicate that expectations became un-anchored? Our model for global expectations suggests otherwise. We find that, after the crisis, inflation itself was perceived to react more strongly to aggregate demand. Rational agents thus adjusted their expectations more strongly when aggregate conditions changed. It appears that inflation targeting has remained credible.

Hmm.. Much simpler to figure research this way..

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