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The Effect of Monetary Policy on Commodity Prices: Disentangling the Evidence for Individual Prices

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  • Carolina Arteaga Cabrales

    ()

  • Joan Camilo Granados Castro

    ()

  • Jair Ojeda Joya

    ()

Abstract

In this paper we study the effect of monetary policy shocks on commodity prices. While most of the literature has found that expansionary shocks have a positive effect on aggregate price indices, we study the effect on individual prices of a sample of four commodities. This set of commodity prices is essential to understand the dynamics of the balance of payments in Colombia. The analysis is based on structural VAR models, we identify monetary policy shocks following [Kim, 1999, 2003] upon quarterly data for commodity prices and their fundamentals for the period 1980q1 to 2010q3. Our results show that commodity prices overshoot their long run equilibrium in response to a contractionary shock in the US monetary policy and, in contrast with literature, the response of the individual prices considered is stronger than what has been found in aggregate indices. Additionally, it is found that the monetary policy explains a substantial share of the fluctuations in prices.

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Bibliographic Info

Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 685.

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Length: 28
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:bdr:borrec:685

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Keywords: Commodity Prices; Monetary Policy; Overshooting. Classification JEL: E31; E52; F42; Q17; Q43.;

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  1. Alessio Anzuini & Marco J. Lombardi & Patrizio Pagano, 2012. "The impact of monetary policy shocks on commodity prices," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 851, Bank of Italy, Economic Research and International Relations Area.
  2. Kim, Soyoung, 1999. "Do monetary policy shocks matter in the G-7 countries? Using common identifying assumptions about monetary policy across countries," Journal of International Economics, Elsevier, Elsevier, vol. 48(2), pages 387-412, August.
  3. Hong Liang & C. John McDermott & Paul Cashin, 1999. "How Persistent Are Shocks to World Commodity Prices?," IMF Working Papers 99/80, International Monetary Fund.
  4. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
  5. Eduardo Borensztein & Carmen Reinhart, 1994. "The Macroeconomic Determinants of Commodity Prices," IMF Working Papers 94/9, International Monetary Fund.
  6. Luis Eduardo Arango & Fernando Arias & Luz Adriana Flórez, 2008. "Trends, Fluctuations, and Determinants of Commodity Prices," BORRADORES DE ECONOMIA 004734, BANCO DE LA REPÚBLICA.
  7. Renee Fry & Callum Jones & Christopher Kent, 2010. "Inflation in an Era of Relative Pirce Shocks," CAMA Working Papers 2010-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  8. Marco Lombardi & Chiara Osbat & Bernd Schnatz, 2012. "Global commodity cycles and linkages: a FAVAR approach," Empirical Economics, Springer, Springer, vol. 43(2), pages 651-670, October.
  9. Renee Fry & Callum Jones & Christopher Kent, 2010. "Inflation in an Era of Relative Pirce Shocks," CAMA Working Papers 2010-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  10. Akram, Q. Farooq, 2009. "Commodity prices, interest rates and the dollar," Energy Economics, Elsevier, Elsevier, vol. 31(6), pages 838-851, November.
  11. Kim, Soyoung, 2003. "Monetary policy, foreign exchange intervention, and the exchange rate in a unifying framework," Journal of International Economics, Elsevier, Elsevier, vol. 60(2), pages 355-386, August.
  12. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  13. Bordo, Michael David, 1980. "The Effects of Monetary Change on Relative Commodity Prices and the Role of Long-Term Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(6), pages 1088-1109, December.
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