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Monetary policy spillovers, global commodity prices and cooperation

Author

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  • Andrew Filardo
  • Jacopo Lombardi
  • Carlos Montoro

Abstract

How do monetary policy spillovers complicate the trade-offs faced by central banks face when responding to commodity prices? This question takes on particular relevance when monetary authorities find it difficult to accurately diagnose the drivers of commodity prices. If monetary authorities misdiagnose commodity price swings as being driven primarily by external supply shocks when they are in fact driven by global demand shocks, this conventional wisdom - to look through the first-round effects of commodity price fluctuations - may no longer be sound policy advice. To analyse this question, we use the multi-country DSGE model of Nakov and Pescatori (2010) which breaks the global economy down into commodity-exporting and non-commodity-exporting economies. In an otherwise conventional DSGE setup, commodity prices are modelled as endogenously changing with global supply and demand developments, including global monetary policy conditions. This framework allows us to explore the implications of domestic monetary policy decisions when there is a risk of misdiagnosing the drivers of commodity prices. The main findings are: i) monetary authorities deliver better economic performance when they are able to accurately identify the source of the shocks, ie global supply and demand shocks driving commodity prices; ii) when they find it difficult to identify the supply and demand shocks, monetary authorities can limit the deterioration in economic performance by targeting core inflation; and iii) the conventional wisdom approach of responding to global commodity price swings (as external supply shocks when they are truly global demand shocks) results in an excessive procyclicality of global inflation, output and commodity prices. In light of recent empirical studies documenting a significant role of global demand in driving commodity prices, we conclude that the systematic misdiagnoses inherent in the conventional wisdom applied at the country level have contributed to destabilising procyclicality at the global level. These findings support calls for greater attention to global factors in domestic monetary policymaking and highlight potential gains from greater monetary policy cooperation focused on accurate diagnoses of domestic and global sources of shocks.

Suggested Citation

  • Andrew Filardo & Jacopo Lombardi & Carlos Montoro, 2018. "Monetary policy spillovers, global commodity prices and cooperation," BIS Working Papers 696, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:696
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    Cited by:

    1. Castillo, Paul & Montoro, Carlos & Tuesta, Vicente, 2020. "Inflation, oil price volatility and monetary policy," Journal of Macroeconomics, Elsevier, vol. 66(C).
    2. Takuji Fueki & Jouchi Nakajima & Shinsuke Ohyama & Yoichiro Tamanyu, 2021. "Identifying oil price shocks and their consequences: The role of expectations in the crude oil market," International Finance, Wiley Blackwell, vol. 24(1), pages 53-76, April.
    3. Apergis, Nicholas & Chatziantoniou, Ioannis & Cooray, Arusha, 2020. "Monetary policy and commodity markets: Unconventional versus conventional impact and the role of economic uncertainty," International Review of Financial Analysis, Elsevier, vol. 71(C).
    4. M. Tiunova G. & М. Тиунова Г., 2018. "Влияние Внешних Шоков На Российскую Экономику // The Impact Of External Shocks On The Russian Economy," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, vol. 22(4), pages 146-170.
    5. Ernest Gnan & Claudia Kwapil & Maria Teresa Valderrama, 2018. "Monetary policy after the crisis: mandates, targets, and international linkages," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q2/18, pages 8-33.

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    More about this item

    Keywords

    commodity prices; monetary policy; spillovers; global economy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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