Oil price–inflation pass-through in Romania during the inflation targeting regime

ABSTRACT

In the wake of the inflation-targeting strategy in Romania, we estimate the impact of international oil prices upon the consumer price index (CPI) and core inflation. The inflation target was systematically missed by the monetary authorities who explain this failure by exogenous factors. Using a frequency domain framework, we show that the oil price–inflation pass-through can be observed only for those components of inflation which include volatile prices and only in the medium run. Our results put forward that the constant missing of the target cannot be explained by the oil price–inflation pass-through and the credibility of the strategy is put into question.

KEYWORDS:

• Oil price–inflation pass-through
• frequency domain
• Granger causality
• inflation targeting strategy
• Romania

JEL CLASSIFICATION:

• C32
• E31
• Q43

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The inflation targeting represents a scheme characterized by the following elements (Mishkin 1999): The announcement of medium-term numerical inflation targets; an institutional commitment to price stability; a strategy that considers all the available information in the decision-making process; increased transparency of the monetary policy through a better communication; a greater accountability of the central bank for reaching its target. New Zealand was the first country to adopt the inflation targeting in 1990. Since then, many countries have adopted the same regime (Maertens Odria, Castillo, and Rodriguez 2012). Consequently, a plethora of studies analysed the results of the adoption of an inflation-targeting regime and found that macroeconomic performances were improved (Mishkin 2000), that inflation is less responsive to foreign shocks, including oil price and exchange rate shocks (Mishkin and Schmidt-Hebbel 2007) or a null effect (Ball and Sheridan 2005; Égert 2011). However, it is generally considered that the inflation-targeting strategy has succeeded in anchoring inflation expectations (Blinder et al. 2008) even if several articles (i.e. Ayres, Belasen, and Kutan 2014) document that the results cannot be generalized, especially in the case of developing countries.

² For the oil price, we have first used the WTI spot price as the WTI Crude is the main global benchmark oil pricing. We have also used the Brent spot price in order to address the robustness of the results, the Brent Crude being the main European benchmark oil pricing. In addition, we relate our analysis to nominal oil prices and not to oil price shocks. However, as shown by LeBlanc and Chinn (2004), the most obvious indicator of an oil price shock is the nominal oil price.

³ Note that the figures of the Granger causality in the frequency domain stand reversed, with short-term fluctuations at the right end and long-term cycles at the left side (high frequencies run for short periods).

⁴ An alternative way of testing the robustness is to use data with different frequencies. However, there are is not possible to find inflation statistics with a higher frequency, while the use of quarterly data implies an insufficient number of observations for a frequency domain analysis.