Anchoring inflation expectations in the face of oil shocks & in the proximity of ZLB: A tale of two targeters

Abstract

This paper applies a N-ARDL framework to two longstanding inflation targeting policy regimes in order to assess the relation between oil prices dynamics and inflation expectations and the further consequences created by a proximal ZLB situation. The application is based on data from January 1994 to June 2018 for New Zealand and the UK. We focus on oil price shocks as a variable of interest and this was found to have an asymmetric effect on inflation expectations. One further key finding is that the real effective exchange rate has significant impacts on inflation expectations and this is indicative of an exchange rate pass-through to inflation via an inflation expectations channel. In general, we find that inflation, exchange rate, money supply, output growth, unemployment and fiscal deficit/surplus have significant implications for inflation expectations. Inflation expectations are also influenced by their past behaviour indicating adaptive inflation expectations. This study contributes to the debate on the inflation targeting at ZLB.