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The Effect of Monetary Policy on Real Commodity Prices

  • Jeffrey A. Frankel

Commodity prices are back. This paper looks at connections between monetary policy, and agricultural and mineral commodities. We begin with the monetary influences on commodity prices, first for a large country such as the United States, then smaller countries. The claim is that low real interest rates lead to high real commodity prices. The theory is an analogy with Dornbusch overshooting. The relationship between real interest rates and real commodity prices is also supported empirically. One channel through which this effect is accomplished is a negative effect of interest rates on the desire to carry commodity inventories. The paper concludes with a consideration of implications for monetary policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12713.

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Date of creation: Dec 2006
Date of revision:
Publication status: published as The Effect of Monetary Policy on Real Commodity Prices , Jeffrey A. Frankel. in Asset Prices and Monetary Policy , Campbell. 2008
Handle: RePEc:nbr:nberwo:12713
Note: ME
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  1. Lars E.O. Svensson & Michael Woodford, 2004. "Implementing Optimal Policy through Inflation-Forecast Targeting," NBER Chapters, in: The Inflation-Targeting Debate, pages 19-92 National Bureau of Economic Research, Inc.
  2. Mankiw, N. Gregory & Reis, Ricardo, 2002. "What measure of inflation should a central bank target?," Working Paper Series 0170, European Central Bank.
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  6. Brenner, Robin J. & Kroner, Kenneth F., 1995. "Arbitrage, Cointegration, and Testing the Unbiasedness Hypothesis in Financial Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 23-42, March.
  7. Robert E. Hall, 1982. "Explorations in the Gold Standard and Related Policies for Stabilizing the Dollar," NBER Chapters, in: Inflation: Causes and Effects, pages 111-122 National Bureau of Economic Research, Inc.
  8. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346.
  9. Jian Yang & David A. Bessler & David J. Leatham, 2001. "Asset storability and price discovery in commodity futures markets: A new look," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(3), pages 279-300, 03.
  10. Sebastian Edwards, 2002. "The Great Exchange Rate Debate after Argentina," Working Papers 74, Oesterreichische Nationalbank (Austrian Central Bank).
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  12. Boum-Jong Choe, 1990. "Rational expectations and commodity price forecasts," Policy Research Working Paper Series 435, The World Bank.
  13. Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
  14. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
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  17. T. Randall Fortenbery & Hector O. Zapata, 1997. "An evaluation of price linkages between futures and cash markets for cheddar cheese," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 17(3), pages 279-301, 05.
  18. Edwards, Sebastian & Levy Yeyati, Eduardo, 2005. "Flexible exchange rates as shock absorbers," European Economic Review, Elsevier, vol. 49(8), pages 2079-2105, November.
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  20. repec:rus:hseeco:123927 is not listed on IDEAS
  21. Svensson, Lars E O, 1995. "The Swedish Experience of an Inflation Target," CEPR Discussion Papers 1103, C.E.P.R. Discussion Papers.
  22. Frankel, Jeffrey & Saiki, Ayako, 2002. "A Proposal to Anchor Monetary Policy by the Price of the Export Commodity," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 417-448.
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