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Commodity Price Fluctuations, Core Inflation and Policy Interest Rates

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Abstract

The world economy has recently been hit by commodity price fluctuations, with first round effects on noncore inflation and second round effects on core inflation. The policy response to commodity price fluctuations depends on the first and second round effects as well as on the strength of the central bank reaction to noncore inflation. The impulse responses and the historical error decomposition exercises show that the second round effects have followed two cycles, the first one before and after Lehman crisis; the second one, that started in 2010, exerted particularly strong downward pressure on interest rates during 2015-2016. The results are obtained with a global model of the largest five systemic economies plus one non systemic economy. In the model, latent variables are obtained with the multivariate Kalman filter and parameters are estimated with Bayesian methods.

Suggested Citation

  • Javier G. Gómez-Pineda, 2016. "Commodity Price Fluctuations, Core Inflation and Policy Interest Rates," Borradores de Economia 967, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:967
    DOI: 10.32468/be.967
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    References listed on IDEAS

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    1. José de Gregorio, 2012. "Commodity Prices, Monetary Policy and Inflation," Working Papers wp359, University of Chile, Department of Economics.
    2. José De Gregorio, 2012. "Commodity Prices, Monetary Policy, and Inflation†," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(4), pages 600-633, December.
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    More about this item

    Keywords

    Commodity prices; Oil price shocks; Second round effects; Inflation;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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