IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Commodity Prices, Monetary Policy and Inflation

  • José de Gregorio

During the second half of the 2000s, the world experienced a rapid and substantial rise in commodity prices. This shock posed complex challenges for monetary policy, in particular due to the significant increase in food and energy prices, and the repercussions they had on aggregate inflation measures. This paper discusses the role of commodity price shocks in monetary policy in the light of recent episodes of such shocks. It begins by discussing whether monetary policy should target core or headline inflation, and what should be the role of commodity price shocks in setting interest rates. It is argued that there are good reasons to focus on headline inflation, as most central banks actually do. Although core inflation provides a good indicator of underlying inflationary pressures, the evolution of commodity prices should not be overlooked, because of pervasive second-round effects. This paper reviews the evidence on the rise of inflation across countries and reports that food inflation, more than energy inflation, has relevant propagation effects on core inflation. This finding is particularly important in emerging market economies, where the share of food in the consumer basket is significant. The evidence also shows that countries that had lower inflation during the run up of commodity prices before the global crisis had more inflation in the subsequent rise after the global crisis, suggesting that part of the pre-crisis inflationary success may have been due to repressed inflation. This paper also discusses other factors that may explain different inflationary performances across countries.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.econ.uchile.cl/uploads/publicacion/ae00046e315f72f9eb23355180ed75feaea292f8.pdf
Download Restriction: no

Paper provided by University of Chile, Department of Economics in its series Working Papers with number wp359.

as
in new window

Length: 41 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:udc:wpaper:wp359
Contact details of provider: Web page: http://www.econ.uchile.cl/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Jeffrey A. Frankel, 2010. "A Comparison of Monetary Anchor Options, Including Product Price Targeting, for Commodity-Exporters in Latin America," NBER Working Papers 16362, National Bureau of Economic Research, Inc.
  2. Juan Pablo Medina & Claudio Soto, 2005. "Oil Shocks and Monetary Policy in an Estimated DSGE Model for a Small Open Economy," Working Papers Central Bank of Chile 353, Central Bank of Chile.
  3. Rahul Anand & Eswar S. Prasad, 2010. "Optimal Price Indices for Targeting Inflation Under Incomplete Markets," NBER Working Papers 16290, National Bureau of Economic Research, Inc.
  4. Luis Catão & Roberto Chang, 2010. "World Food Prices and Monetary Policy," NBER Working Papers 16563, National Bureau of Economic Research, Inc.
  5. Nicoletta Batini & Eugen Tereanu, 2010. "Inflation targeting during asset and commodity price booms," Oxford Review of Economic Policy, Oxford University Press, vol. 26(1), pages 15-35, Spring.
  6. Michael Pedersen, 2011. "Propagation of Shocks to Food and Energy Prices: an International Comparison," Working Papers Central Bank of Chile 648, Central Bank of Chile.
  7. Jose de Gregorio & Oscar Landerretche & Christopher Neilson, 2007. "Another Pass-Through Bites the Dust? Oil Prices and Inflation," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  8. Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2008. "Optimal monetary policy with distinct core and headline inflation rates," International Finance Discussion Papers 941, Board of Governors of the Federal Reserve System (U.S.).
  9. Alfredo Pistelli & Víctor Riquelme, 2010. "Auge y caída de precios de commodities y su impacto sobre precios domésticos: Comparación internacional," Working Papers Central Bank of Chile 567, Central Bank of Chile.
  10. Okano, Eiji, 2007. "The choice of the inflation rate as a target in an economy with pricing-to-market," Japan and the World Economy, Elsevier, vol. 19(1), pages 48-67, January.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:udc:wpaper:wp359. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tatiana Reyes)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.