Price Adjustment to the Exchange Rate Shock in World Commodity Markets

We empirically investigate dynamic responses of 49 IMF primary commodity prices to the US dollar exchange rate shock using recursively identified vector autoregressive models. Our major empirical findings are as follows. First, price adjustments toward the new equilibrium tend to be gradual with a few exceptions. We propose and estimate two measures of price-stickiness, which provide strong evidence of short-run price rigidity in most commodities. Second, our dynamic elasticity analysis implies that price responses are quite heterogeneous even in the long-run. Some commodity prices over-adjust to the exchange rate shock, which implies higher volatility of those prices than that of the exchange rate. Third, for those commodities that over-adjust, prices in the rest of the world would rise significantly when the US dollar depreciates unexpectedly, suggesting a role for price stabilization policies.