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Empirical Economics

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01.09.2015

The informational role of commodity prices in formulating monetary policy: a reexamination under the frequency domain

verfasst von: Yanfeng Wei

Erschienen in: Empirical Economics | Ausgabe 2/2015

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Abstract

This paper employs the frequency domain causality test proposed by Breitung and Candelon (J Econom 132:363–378, 2006) to investigate whether commodity prices are useful in formulating monetary policy. Based on the monthly U.S. data from January 1957 to December 2011, we find the frequency domain causal relationship between non-oil commodity prices and economic activities (e.g., consumer prices and industrial production) has changed dramatically over time. Our results indicate that the non-oil commodity prices are useful in setting monetary policy in the 1970s and the beginning of 1980s, but the usefulness has disappeared completely since the early 1980s. In contrast, the oil price or the commodity price index including oil price can still be used as an informational variable for managing monetary policy after the early 1980s.

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See, for example, Cody and Mills (1991), Awokuse and Yang (2003) and Bhar and Hamori (2008).

There is another popular commodity price index named Reuters/Jefferies CRB Index. Both the CCI and Reuters/Jefferies CRB index stem from the old Reuters CRB index. In 2005, the Reuters CRB index was revised (the tenth revision) greatly and has been named Reuters/Jefferies CRB Index since this revision. Meanwhile, the old Reuters CRB index based on the ninth revision is still provided and named as continuous commodity index (CCI). Thus, before 2005, the CCI is the same as the Reuters/Jefferies CRB index. In the present paper, we use the CCI because its composition does not change too much in recent years. For more details, please see http://www.crbtrader.com/crbindex/symbols.asp.

The volatility of the U.S. economic activity has declined substantially since the beginning of 1980s, and this phenomenon is typically referred to as the “Great Moderation” (Stock and Watson 2002).

Here, we do not consider the cointegration case, but we should note that the frequency domain causality test can be conducted within a cointegration framework, please see Breitung and Candelon (2006) for more details.

The results corresponding to the predictive power of CRB index for the other three variables are available from the author on request.

We also replace the CPI with producer price index (PPI) in the level VAR model with \(k=4\) and \(d=1\), and investigate whether the CRB index Granger causes PPI under the frequency domain. The findings are quite similar to results corresponding to CPI.

Here, we want to mention that even though the oil price is useful for formulating monetary policy, the best monetary policy response to oil price fluctuations may depend on the reasons of the oil price changes, please see Bodenstein et al. (2012) for more details.

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Titel: The informational role of commodity prices in formulating monetary policy: a reexamination under the frequency domain
verfasst von: Yanfeng Wei
Publikationsdatum: 01.09.2015
Verlag: Springer Berlin Heidelberg
Erschienen in: Empirical Economics / Ausgabe 2/2015
Print ISSN: 0377-7332
Elektronische ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-014-0870-2

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