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Did easy money in the dollar bloc fuel the global commodity boom?

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Author Info

  • Christopher Erceg
  • Luca Guerrieri
  • Steven B. Kamin

Abstract

Among the various explanations for the runup in oil and commodity prices of recent years, one story focuses on the role of monetary policy in the United States and in developing economies. In this view, developing countries that peg their currencies to the dollar were forced to ease their monetary policies after reductions in U.S. interest rates, leading to economic overheating, excess demand for oil and other commodities, and rising commodity prices. We assess that hypothesis using the Federal Reserve staff’s forward-looking, multicountry, dynamic general equilibrium model, SIGMA. We find that even if many developing country currencies were pegged to the dollar, an easing of U.S. monetary policy would lead to only a transitory runup in oil prices. Instead, strong economic growth in many developing economies, as well as shortfalls in oil production, better explain the sustained runup in oil prices observed until earlier this year. Moreover, a closer look at exchange rates and interest rates around the world suggests that the monetary policies of many developing economies, including in East Asia, are less closely influenced by U.S. policies than is frequently assumed.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 979.

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Date of creation: 2009
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Handle: RePEc:fip:fedgif:979

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Related research

Keywords: Monetary policy ; Petroleum products - Prices;

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Cited by:
  1. Fumio Hayashi, 2011. "Commentary: Some Methodological Suggestions," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 217-223, March.
  2. Christopher Reicher & Johannes Utlaut, 2011. "The effect of inflation on real commodity prices," Kiel Working Papers 1704, Kiel Institute for the World Economy.
  3. Engel, Charles & Wang, Jian, 2011. "International trade in durable goods: Understanding volatility, cyclicality, and elasticities," Journal of International Economics, Elsevier, vol. 83(1), pages 37-52, January.

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