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Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: evidence from three Nordic Kingdoms

Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: evidence from three Nordic Kingdoms
Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: evidence from three Nordic Kingdoms
In the context of the debate on inflation targeting, this paper analyses the impact of the oil shocks on inflation expectations in three Nordic Kingdoms. A NARDL framework is applied to data from Jan 1994 to June 2018 on the Kingdoms of Norway, Sweden and Denmark. Our key findings suggest that there are considerable nonlinearities and asymmetries in the relationship between inflation expectations, oil shocks and economic determinants of inflation expectations. The expectations formulated in the past have a very significant negative impact on future inflation expectations (adaptive expectations) and there is heterogeneity in the adaptiveness pace. A country’s net oil trade
position seems to reflect on the impact of oil price shocks on the inflation expectations and there is asymmetry and downwards inflation expectations rigidity. There is strong evidence of exchange rate pass-through to inflation expectations. Prevailing regimes of price stability can support to anchor future inflation expectations. Reduction in fiscal deficit and increases in money supply has a positive while unemployment has a negative impact on inflation expectations. The cumulative multiplier analysis showed that the impact of oil shock was symmetric in Sweden and Denmark but asymmetric in Norway
which is a large net oil exporter. Besides the adoption of explicit inflation targeting regime by Sweden and Norway, the inflation expectations in the underlying economies are prone to the oil price shocks and macroeconomic determinants. These shocks pose a whole set of challenges to monetary authorities in these economies and the findings in the subject treatise provide some guidance on how each shock may transmit.
Inflation targeting, NARDL, Nordic KIngdom, oil shocks
1057-5219
Nasir, Muhammad Ali
c28b4e94-83c6-4f3e-a1cf-b5afd6cce86b
Huynh, Toan Luu Duc
6771614a-3676-4d15-8166-1918737ee6a0
Yarovaya, Larisa
2bd189e8-3bad-48b0-9d09-5d96a4132889
Nasir, Muhammad Ali
c28b4e94-83c6-4f3e-a1cf-b5afd6cce86b
Huynh, Toan Luu Duc
6771614a-3676-4d15-8166-1918737ee6a0
Yarovaya, Larisa
2bd189e8-3bad-48b0-9d09-5d96a4132889

Nasir, Muhammad Ali, Huynh, Toan Luu Duc and Yarovaya, Larisa (2020) Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: evidence from three Nordic Kingdoms. International Review of Financial Analysis, 72, [101558]. (doi:10.1016/j.irfa.2020.101558).

Record type: Article

Abstract

In the context of the debate on inflation targeting, this paper analyses the impact of the oil shocks on inflation expectations in three Nordic Kingdoms. A NARDL framework is applied to data from Jan 1994 to June 2018 on the Kingdoms of Norway, Sweden and Denmark. Our key findings suggest that there are considerable nonlinearities and asymmetries in the relationship between inflation expectations, oil shocks and economic determinants of inflation expectations. The expectations formulated in the past have a very significant negative impact on future inflation expectations (adaptive expectations) and there is heterogeneity in the adaptiveness pace. A country’s net oil trade
position seems to reflect on the impact of oil price shocks on the inflation expectations and there is asymmetry and downwards inflation expectations rigidity. There is strong evidence of exchange rate pass-through to inflation expectations. Prevailing regimes of price stability can support to anchor future inflation expectations. Reduction in fiscal deficit and increases in money supply has a positive while unemployment has a negative impact on inflation expectations. The cumulative multiplier analysis showed that the impact of oil shock was symmetric in Sweden and Denmark but asymmetric in Norway
which is a large net oil exporter. Besides the adoption of explicit inflation targeting regime by Sweden and Norway, the inflation expectations in the underlying economies are prone to the oil price shocks and macroeconomic determinants. These shocks pose a whole set of challenges to monetary authorities in these economies and the findings in the subject treatise provide some guidance on how each shock may transmit.

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Accepted/In Press date: 28 July 2020
e-pub ahead of print date: 11 September 2020
Published date: November 2020
Keywords: Inflation targeting, NARDL, Nordic KIngdom, oil shocks

Identifiers

Local EPrints ID: 446714
URI: http://eprints.soton.ac.uk/id/eprint/446714
ISSN: 1057-5219
PURE UUID: a570805d-100a-448d-8c39-539ec7eff109
ORCID for Larisa Yarovaya: ORCID iD orcid.org/0000-0002-9638-2917

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Date deposited: 18 Feb 2021 17:34
Last modified: 28 Apr 2022 05:58

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Contributors

Author: Muhammad Ali Nasir
Author: Toan Luu Duc Huynh
Author: Larisa Yarovaya ORCID iD

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