The Effect of Monetary Policy on Real Commodity Prices
Commodity prices are back. This paper looks at connections between monetary policy, and agricultural and mineral commodities. We begin with the monetary influences on commodity prices, first for a large country such as the United States, then smaller countries. The claim is that low real interest rates lead to high real commodity prices. The theory is an analogy with Dornbusch overshooting. The relationship between real interest rates and real commodity prices is also supported empirically. One channel through which this effect is accomplished is a negative effect of interest rates on the desire to carry commodity inventories. The paper concludes with a consideration of implications for monetary policy.
The author would like to thank Ellis Connolly and Yun Jung Kim for exceptionally capable research assistance, and to thank for comments John Campbell, Pravin Chandrasekaran, Gunes Asik, and Lars Svensson. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
The Effect of Monetary Policy on Real Commodity Prices, Jeffrey A. Frankel. in Asset Prices and Monetary Policy, Campbell. 2008