Elsevier

Journal of Policy Modeling

Volume 43, Issue 5, September–October 2021, Pages 982-999
Journal of Policy Modeling

Commodities and monetary policy: Implications for inflation and price level targeting

https://doi.org/10.1016/j.jpolmod.2021.02.013Get rights and content
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open access

Abstract

We examine the relative ability of inflation targeting and price level targeting monetary policy rules to minimize inflation variability and business cycle fluctuations in a commodity-exporting country for supply and demand shocks to global commodity markets. The macroeconomic consequences of oil and non-oil primary commodities differ and affect the relative merits of the alternative monetary policy frameworks. Particularly, the consumption of refined oil products and demand-driven commodity price movements induce highly persistent inflation pressures resulting in a significant deterioration of the inflation-output gap trade-off available to central banks. When such terms-of-trade shocks are prevalent, price level targeting is inferior to inflation targeting.

Keywords

Global economy
Monetary policy
Oil price
Open economy
Policy rule

JEL classification

E52
F41
Q43

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