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Commodity prices, money and inflation

  • Browne, Frank
  • Cronin, David

The influence of commodity prices on consumer prices is usually seen as originating in commodity markets. We argue, however, that long run and short run relationships should exist between commodity prices, consumer prices and money and that the influence of commodity prices on consumer prices occurs through a money-driven overshooting of commodity prices being corrected over time. Using a cointegrating VAR framework and US data, our empirical findings are supportive of these relationships, with both commodity and consumer prices proportional to the money supply in the long run, commodity prices initially overshooting their new equilibrium values in response to a money supply shock, and the deviation of commodity prices from their equilibrium values having explanatory power for subsequent consumer price inflation. JEL Classification: E310, E510, E520

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Paper provided by European Central Bank in its series Working Paper Series with number 0738.

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Date of creation: Mar 2007
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Handle: RePEc:ecb:ecbwps:20070738
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  1. Reynard, Samuel, 2007. "Maintaining low inflation: money, interest rates, and policy stance," Working Paper Series 0756, European Central Bank.
  2. Hafer, R.W. & Haslag, Joseph H. & Jones, Garett, 2007. "On money and output: Is money redundant?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 945-954, April.
  3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  4. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198 National Bureau of Economic Research, Inc.
  5. Fuhrer, Jeff & Moore, George, 1992. "Monetary policy rules and the indicator properties of asset prices," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 303-336, April.
  6. Batini, Nicoletta & Nelson, Edward, 2001. "The Lag from Monetary Policy Actions to Inflation: Friedman Revisited," International Finance, Wiley Blackwell, vol. 4(3), pages 381-400, Winter.
  7. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  8. Roy H. Webb, 1988. "Commodity prices as predictors of aggregate price change," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 3-11.
  9. Hafer, R.W. & Jones, Garett, 2008. "Dynamic IS curves with and without money: An international comparison," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 609-616, June.
  10. Cody, Brian J & Mills, Leonard O, 1991. "The Role of Commodity Prices in Formulating Monetary Policy," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 358-65, May.
  11. Fred Furlong & Robert Ingenito, 1996. "Commodity prices and inflation," Economic Review, Federal Reserve Bank of San Francisco, pages 27-47.
  12. Garner, C Alan, 1989. "Commodity Prices: Policy Target or Information Variable? A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 508-14, November.
  13. S. Brock Blomberg & Ethan S. Harris, 1995. "The commodity-consumer price connection: fact or fable?," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 21-38.
  14. Surrey, M J C, 1989. "Money, Commodity Prices and Inflation: Some Simple Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 51(3), pages 219-38, August.
  15. Pecchenino, R. A., 1992. "Commodity prices and the CPI: Cointegration, information, and signal extraction," International Journal of Forecasting, Elsevier, vol. 7(4), pages 493-500, March.
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