Inflation target and (a)symmetries in the oil price pass-through to inflation

Highlights: • We estimate the impact of inflation targeting on the oil price pass-through to domestic inflation • When oil price increases, we do not find any difference between IT and non-IT countries • When oil price decreases, the pass-through is significantly larger in IT countries • This is observed particularly during deflationary events or when inflation is above target • The asymmetric oil price pass-through observed in the literature may partly be explained by monetary policy reactions -- Abstract: In this paper we employ state-space models to estimate the pass-through of oil price changes to consumer prices for a large sample of countries from 1970 to 2017. By controlling for self-selection bias and endogeneity and allowing for different responses to positive and negative price changes, we asses the differences between explicit inflation targeting (IT) countries and a control group. Surprisingly perhaps, our results suggest that the pass-through is higher for IT countries. Our main contribution is to show that these is mainly due to IT countries having a significant higher pass-through than non-IT countries when the oil price decreases: a 10% drop in oil price leads about a 0.11% drop in inflation in ITers (of which 4pp are explained by the monetary regime). Importantly, we show that adopting IT reduces the asymmetry of the pass-through. We run several robustness checks and conclude that falling oil prices are more welcomed by the central banks with an IT framework, in particular during deflationary episodes or when inflation is above the target.