Monetary Policy Transmission through Commodity Prices

By Jorge Miranda-Pinto, Andrea Pescatori, Ervin Prifti, Guillermo Verduzco-Bustos

October 10, 2023

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Jorge Miranda-Pinto, Andrea Pescatori, Ervin Prifti, and Guillermo Verduzco-Bustos. Monetary Policy Transmission through Commodity Prices, (USA: International Monetary Fund, 2023) accessed December 2, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Monetary policy influences inflation dynamics by exerting impact on a diverse array of commodity prices. At high frequencies, we show that a 10 basis points increase in US monetary policy rate reduces commodity prices between 0.5% and 2.5%, after 18 to 24 business days. Beyond the dollar appreciation channel, the effects are larger for highly storable and industrial commodities, consistent with the cost of carry and the expected demand channel. We then study the quantitative importance of the commodity-price channel of monetary policy on domestic and international inflation at longer horizons (6-36 months). The results indicate that the response of commodity prices—oil, base metals, and food prices—to monetary policy accounts for 47% of the total effect of US monetary policy on US headline inflation, and 57% of the effect of US monetary policy on other countries’ headline inflation. The commodity price channel on core inflation is smaller and mainly driven by base metal prices. Finally, the commodity-price channel of ECB monetary policy is smaller, and it mainly operates through its effect on energy prices.

Subject: Commodity prices, Food prices, Inflation, Metal prices, Oil prices, Prices

Keywords: Channel of monetary policy, Commodity price channel, Commodity prices, Commodity-price channel, Core inflation, ECB monetary policy shock, Energy prices, Food prices, Global, Inflation, Inflation dynamics, Metal prices, Metals prices, Monetary Policy, Monetary policy shock, Oil prices, US monetary policy shock

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/215
Stock No:

WPIEA2023215
ISBN:

9798400256691
ISSN:

1018-5941

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