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Commodity Prices and Monetary Policy in Emerging East Asia

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    Abstract

    In the first-half of the global financial turmoil, rising inflation was a major concern for emerging East Asian central banks. Coupled with a slowing US economy, regional central banks faced an inevitable monetary policy choice of either addressing higher inflation or supporting moderate growth. Higher food and fuel prices were the major drivers of headline inflation. Their causes, however, were a confluence of factors--whether cyclical or structural, domestic or global, supply or demand--all reinforcing each other and contributing to widespread price escalations in all classes of commodities. In response, a raft of fiscal and administrative measures of questionable effectiveness was widely implemented. Understandably, different economies faced different balance of risks between price stability and growth, but to attribute the causes of inflation to supply shocks alone was misleading and probably explained why many central banks were reluctant and/or slow to raise interest rates. This was all the more puzzling given that inflation and inflation expectations were on the rise, and central bank credibility was not in abundance. Without much credibility, inflation expectations cannot be well-anchored. To gain credibility, a central bank must "walk-the-talk" and this is only possible if it has the autonomy to do so.

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    File URL: http://aric.adb.org/pdf/workingpaper/WP23_Commodity_Prices_and_Monetary_Policy.pdf
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    Bibliographic Info

    Paper provided by Asian Development Bank in its series Working Papers on Regional Economic Integration with number 23.

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    Length: 40 pages
    Date of creation: 01 Dec 2008
    Date of revision:
    Handle: RePEc:ris:adbrei:0023

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    Keywords: Commodity prices; inflation; monetary policy; emerging East Asia;

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    1. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
    2. John M. Roberts, 2004. "Monetary policy and inflation dynamics," Finance and Economics Discussion Series 2004-62, Board of Governors of the Federal Reserve System (U.S.).
    3. Alan S. Blinder, 1999. "Central Bank Credibility: Why Do We Care? How Do We Build It?," NBER Working Papers 7161, National Bureau of Economic Research, Inc.
    4. Olivier J. Blanchard & Jordi Gali, 2007. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s?," NBER Working Papers 13368, National Bureau of Economic Research, Inc.
    5. Frederic S. Mishkin, 2008. "Does Stabilizing Inflation Contribute To Stabilizing Economic Activity?," NBER Working Papers 13970, National Bureau of Economic Research, Inc.
    6. Jongwanich, Juthathip & Park, Donghyun, 2009. "Inflation in developing Asia," Journal of Asian Economics, Elsevier, vol. 20(5), pages 507-518, September.
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