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Discussion Paper
The Relationship Between Oil Prices and Inflation Compensation
In this note, we provide new empirical evidence supporting this conjecture that changes in the outlook for global economic activity explain the co-movement between oil prices and inflation compensation. In particular, we present an empirical strategy to identify changes in oil prices that are a response to economic activity (demand-induced) and changes in oil prices that are responding to oil-specific developments (supply-induced). Our main finding is that demand-induced oil price declines can explain most of the move in inflation compensation. As a consequence, economists would do well to ...