Does Monetary Policy Credibility Play a Role in the Transmission of Oil Price Shocks to Inflation Expectations?
Does monetary policy credibility play a role in the transmission of positive oil price shocks to inflation expectations? The credibility is examined via the role of (1) consumer price inflation from the 3–6% target band and (2) monetary policy credibility as measured by squared deviations from the 6% inflation rate, which is the upper of the inflation target band. Evidence suggests that keeping the consumer price inflation within the target band has a dampening impact on the increase of inflation expectations following a positive oil price shock. This suggests the need to anchor the consumer price inflation within the target band and raising the credibility of monetary policy conduct, to mitigates the pass-through of positive oil price shocks to inflation expectation.
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