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The Effect of Monetary Policy on Real Commodity Prices

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  • Jeffrey A. Frankel

Abstract

Commodity prices are back. This paper looks at connections between monetary policy, and agricultural and mineral commodities. We begin with the monetary influences on commodity prices, first for a large country such as the United States, then smaller countries. The claim is that low real interest rates lead to high real commodity prices. The theory is an analogy with Dornbusch overshooting. The relationship between real interest rates and real commodity prices is also supported empirically. One channel through which this effect is accomplished is a negative effect of interest rates on the desire to carry commodity inventories. The paper concludes with a consideration of implications for monetary policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12713.

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Date of creation: Dec 2006
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Publication status: published as The Effect of Monetary Policy on Real Commodity Prices , Jeffrey A. Frankel. in Asset Prices and Monetary Policy , Campbell. 2008
Handle: RePEc:nbr:nberwo:12713

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  1. Lars E.O. Svensson, 1995. "The Swedish Experience of an Inflation Target," NBER Working Papers 4985, National Bureau of Economic Research, Inc.
  2. Svensson, Lars E O & Woodford, Michael, 2004. "Implementing Optimal Policy Through Inflation-Forecast Targeting," CEPR Discussion Papers 4229, C.E.P.R. Discussion Papers.
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  7. Frankel, Jeffrey & Saiki, Ayako, 2002. "A Proposal to Anchor Monetary Policy by the Price of the Export Commodity," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 417-448.
  8. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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  17. Barsky, Robert B & Summers, Lawrence H, 1988. "Gibson's Paradox and the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 528-50, June.
  18. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346.
  19. Frankel, Jeffrey A & Hardouvelis, Gikas A, 1985. "Commodity Prices, Money Surprises and Fed Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 425-38, November.
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  1. Guest Contribution: Rejoinder to "Oil Price Spike Exacerbated by Wall Street Speculation?"
    by Menzie Chinn in Econbrowser on 2012-07-26 15:35:17
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