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Commodities and Monetary Policy: Implications for Inflation and Price Level Targeting

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  • Donald Coletti
  • René Lalonde
  • Paul Masson
  • Dirk Muir
  • Stephen Snudden

Abstract

We examine the relative ability of simple inflation targeting (IT) and price level targeting (PLT) monetary policy rules to minimize both inflation variability and business cycle fluctuations in Canada for shocks that have important consequences for global commodity prices. We find that commodities can play a key role in affecting the relative merits of the alternative monetary policy frameworks. In particular, large real adjustment costs in energy supply and demand induce highly persistent cost-push pressures in the economy leading to a significant deterioration in the inflation – output gap trade-off available to central banks, particularly to those pursuing price level targeting.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2012/06/wp2012-16.pdf
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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 12-16.

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Length: 36 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bca:bocawp:12-16

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Keywords: Economic models; Inflation and prices; International topics; Monetary policy framework;

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References

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  1. Selim Elekdag & Rene Lalonde & Douglas Laxton & Dirk Muir & Paolo Pesenti, 2008. "Oil Price Movements and the Global Economy: A Model-Based Assessment," NBER Working Papers 13792, National Bureau of Economic Research, Inc.
  2. Sylvain Leduc & Keith Sill, 2001. "A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns," Working Papers 01-9, Federal Reserve Bank of Philadelphia.
  3. Serletis, Apostolos & Rangel-Ruiz, Ricardo, 2004. "Testing for common features in North American energy markets," Energy Economics, Elsevier, vol. 26(3), pages 401-414, May.
  4. Krichene, Noureddine, 2002. "World crude oil and natural gas: a demand and supply model," Energy Economics, Elsevier, vol. 24(6), pages 557-576, November.
  5. Dahl, Carol & Duggan, Thomas E., 1996. "U.S. energy product supply elasticities: A survey and application to the U.S. oil market," Resource and Energy Economics, Elsevier, vol. 18(3), pages 243-263, October.
  6. S. Gurcan Gulen, 1999. "Regionalization in the World Crude Oil Market: Further Evidence," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 125-139.
  7. Lord, M J, 1991. "Price Formation in Commodity Markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(3), pages 239-54, July-Sept.
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Cited by:
  1. Stephen Snudden, 2013. "Cyclical Fiscal Rules for Oil-Exporting Countries," IMF Working Papers 13/229, International Monetary Fund.

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