## Monetary Policy Transmission through Commodity Prices

_IMF Working Papers, October 10, 2023_

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## Bibliographic details
- Authors: Jorge Alberto Miranda Pinto, Andrea Pescatori, Ervin Prifti, Guillermo Verduzco-Bustos
- Published: October 10, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400256691.001

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### Summary
- Monetary policy influences inflation dynamics by exerting impact on a diverse array of commodity prices.
- At high frequencies, 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.
- Over longer horizons (6-36 months), 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.
- The commodity-price channel of ECB monetary policy is smaller than the US channel and mainly operates through its effect on energy prices.

### High-frequency effects
- Shock size: 10 basis points increase in US monetary policy rate.
- Timing: effects observed after 18 to 24 business days.
- Magnitude: commodity prices decline between 0.5% and 2.5% in response to the shock.
- Channels: effects go beyond the dollar appreciation channel; they are larger for highly storable and industrial commodities, consistent with the cost of carry and the expected demand channel.

### Longer-horizon effects on inflation (6-36 months)
- Contribution to headline inflation:
  - 47% of the total effect of US monetary policy on US headline inflation is accounted for by the response of commodity prices (oil, base metals, and food prices).
  - 57% of the effect of US monetary policy on other countries’ headline inflation is accounted for by the response of commodity prices.
- Core inflation: the commodity-price channel on core inflation is smaller compared with headline inflation and is mainly driven by base metal prices.

### Commodity-specific findings
- Oil, base metals, and food prices are the key commodity groups transmitting US monetary policy to headline inflation.
- Base metal prices are the principal driver of the commodity-price channel's effect on core inflation.
- Highly storable and industrial commodities exhibit larger responses to monetary policy shocks, consistent with the cost of carry and expected demand mechanisms.
- ECB monetary policy transmits to prices mainly through energy prices, with a smaller overall commodity-price channel compared with US monetary policy.

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_Source: https://www.imf.org/en/publications/wp/issues/2023/10/10/monetary-policy-transmission-through-commodity-prices-540373_