54 Pages Posted: 23 Apr 2016
Date Written: April 2016
I examine whether commodity prices have been a contributor to the inflation volatility experienced by the Chilean economy in recent years. First, I show that of all commodities, oil is the most significantly correlated with future inflation and inflationary expectations. Next, I use a Gaussian affine term structure model with observable macroeconomic factors to quantitatively study how shocks to oil prices affect bond yields and inflation expectations. I find a statistically significant but economically modest effect. An increase in the price of oil of 20% raises one-year inflation expectations by 25 basis points, while five-year expectations increase only by 8 basis points. The results suggest that central banks could benefit from paying attention to commodity prices when setting monetary policy.
JEL Classification: E44, G01, G12, G20
Suggested Citation: Suggested Citation
Ayala, Andres, Commodity Prices and Inflation Expectations in Chile (April 2016). Columbia Business School Research Paper No. 16-32. Available at SSRN: https://ssrn.com/abstract=2768357