Inflation Responses to Commodity Price Shocks: How and Why Do Countries Differ?
IMF Working Papers, September 1, 2012
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Bibliographic details
- Authors: Gaston Gelos, Yulia Ustyugova
- Published: September 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475510249.001
Overview and scope
- Authors: Gaston Gelos, Yulia Ustyugova
- Date: September 1, 2012
- Period analyzed: 2001-2010
- Paper type: IMF Working Paper No. 2012/225
- Pages: 32
- DOI: https://doi.org/10.5089/9781475510249.001
- Subjects: Commodity price shocks, Commodity prices, Inflation, Inflation targeting, Output gap
- Keywords: headline inflation, WP
Main research question and approach
- Relates the inflationary impact of commodity price shocks across countries to a broad range of structural characteristics and policy frameworks.
- Uses several approaches to quantify cross-country differences in inflation responses over 2001-2010.
Key empirical findings
- Economies with higher food shares in CPI baskets were more prone to experience sustained inflationary effects from commodity price shocks.
- Economies with higher fuel intensities were more prone to experience sustained inflationary effects from commodity price shocks.
- Economies with higher pre-existing inflation levels were more prone to experience sustained inflationary effects from commodity price shocks.
- Countries with more independent central banks contained the impact of commodity price shocks better.
- Countries with higher governance scores contained the impact of commodity price shocks better.
- The effect of the presence of inflation targeting regimes appears very modest and was not evident during the 2008 food price shock.
- Trade openness does not significantly influence the way in which domestic inflation responds to international commodity price shocks.
- Financial development does not significantly influence the way in which domestic inflation responds to international commodity price shocks.
- Dollarization does not significantly influence the way in which domestic inflation responds to international commodity price shocks.
- Labor market flexibility does not significantly influence the way in which domestic inflation responds to international commodity price shocks.
Implications for policy and interpretation
- Structural composition of CPI (notably food share) and energy/fuel intensity matter for how commodity price shocks translate into sustained inflation.
- Monetary policy frameworks that embody greater central bank independence and stronger governance structures are associated with better containment of inflationary pass-through from commodity shocks.
- Adoption of an inflation targeting regime alone shows only a modest association with containment of shock-induced inflation, and its protective effect was not observable during the 2008 food price shock.
- Policies focused solely on trade openness, financial deepening, reducing dollarization, or increasing labor market flexibility should not be expected, based on this analysis, to materially change the transmission of international commodity price shocks into domestic inflation.
Source: IMF Working Paper No. 2012/225, "Inflation Responses to Commodity Price Shocks: How and Why Do Countries Differ?" by Gaston Gelos and Yulia Ustyugova, September 1, 2012.