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Commodities and Monetary Policy: Implications for Inflation and Price Level Targeting

Author

Listed:
  • Donald Coletti
  • René Lalonde
  • Paul Masson
  • Dirk Muir
  • Stephen Snudden

Abstract

We examine the relative ability of simple inflation targeting (IT) and price level targeting (PLT) monetary policy rules to minimize both inflation variability and business cycle fluctuations in Canada for shocks that have important consequences for global commodity prices. We find that commodities can play a key role in affecting the relative merits of the alternative monetary policy frameworks. In particular, large real adjustment costs in energy supply and demand induce highly persistent cost-push pressures in the economy leading to a significant deterioration in the inflation – output gap trade-off available to central banks, particularly to those pursuing price level targeting.

Suggested Citation

  • Donald Coletti & René Lalonde & Paul Masson & Dirk Muir & Stephen Snudden, 2012. "Commodities and Monetary Policy: Implications for Inflation and Price Level Targeting," Staff Working Papers 12-16, Bank of Canada.
  • Handle: RePEc:bca:bocawp:12-16
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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2012/06/wp2012-16.pdf
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    References listed on IDEAS

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    1. Krichene, Noureddine, 2002. "World crude oil and natural gas: a demand and supply model," Energy Economics, Elsevier, pages 557-576.
    2. Apostolos Serletis & Ioannis Andreadis, 2007. "Random Fractal Structures in North American Energy Markets," World Scientific Book Chapters,in: Quantitative And Empirical Analysis Of Energy Markets, chapter 18, pages 245-255 World Scientific Publishing Co. Pte. Ltd..
    3. Selim Elekdag & René Lalonde & Douglas Laxton & Dirk Muir & Paolo Pesenti, 2008. "Oil Price Movements and the Global Economy: A Model-Based Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 55(2), pages 297-311, June.
    4. Apostolos Serletis & Ricardo Rangel-Ruiz, 2007. "Testing for Common Features in North American Energy Markets," World Scientific Book Chapters,in: Quantitative And Empirical Analysis Of Energy Markets, chapter 14, pages 172-187 World Scientific Publishing Co. Pte. Ltd..
    5. Dahl, Carol & Duggan, Thomas E., 1996. "U.S. energy product supply elasticities: A survey and application to the U.S. oil market," Resource and Energy Economics, Elsevier, vol. 18(3), pages 243-263, October.
    6. Leduc, Sylvain & Sill, Keith, 2004. "A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns," Journal of Monetary Economics, Elsevier, pages 781-808.
    7. Lord, M J, 1991. "Price Formation in Commodity Markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(3), pages 239-254, July-Sept.
    8. S. Gurcan Gulen, 1999. "Regionalization in the World Crude Oil Market: Further Evidence," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 125-139.
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    Citations

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    Cited by:

    1. Snudden, Stephen, 2016. "Cyclical fiscal rules for oil-exporting countries," Economic Modelling, Elsevier, pages 473-483.
    2. Karol Szafranek, 2015. "Financialisation of the commodity markets. Conclusions from the VARX DCC GARCH," NBP Working Papers 213, Narodowy Bank Polski, Economic Research Department.
    3. Declan Trott, 2015. "Australia and the Zero Lower Bound on Interest Rates: Some Monetary Policy Options," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 22(1), pages 5-20.

    More about this item

    Keywords

    Economic models; Inflation and prices; International topics; Monetary policy framework;

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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