Academic journal article Monthly Labor Review

Inflation Expectations and Oil Shocks

Academic journal article Monthly Labor Review

Inflation Expectations and Oil Shocks

Article excerpt

One might assume that the U.S. Federal Reserve sets inflation targets, it being the controller of the Nation's money supply and (according to economists who believe that inflation is a monetary phenomenon) determiner of the Nation's inflation rate.

In fact, although "stable prices" are among its monetary policy objectives, the Federal Reserve does not set official inflation targets. The Fed does not publicly announce a "target" inflation rate and then attempt to guide the actual inflation rate towards the target. Some economists maintain that the Federal Reserve should do so.

According to "Inflation Targets and Inflation Expectations: Some Evidence from the Recent Oil Shocks" (FRBSF Economic Letter, Federal Reserve Bank of San Francisco, September 1, 2006) by Bharat Trehan and Jason Tjosvold, inflation expectations in countries where central banks target inflation should differ from expectations in countries where the central banks do not target inflation, given the same inflation causing event.

The authors look at expectations of future inflation in three countries: the United States (which does not have an official inflation target), Canada, and the United Kingdom (which do). High inflation followed oil price shocks in all three countries during the 1970s, so recent increases in the price of oil are the inflationary event studied. …

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