Economics, Econometrics and Finance
3 years ago

Oil prices impact inflation compensation, leading to higher long-term premiums.

SSRN Electronic Journal
Oil and Inflation Compensation: Evidence from Treasury Inflation-Protected Security Prices
Hao Chang, Xue Yan

Paper Summary

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Macroeconomic Trends

The correlation between oil prices and long-term inflation compensation increased after the financial crisis because investors worry about deflation when interest rates are low. This leads them to adjust their inflation expectations more quickly after oil price drops, paying higher premiums to protect against deflation risks. This happens because investors doubt that monetary policy can prevent deflation when interest rates are near zero.