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Monetary Policy Transmission Through Commodity Prices
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.
Beyond Energy: Inflationary Effects of Metals Price Shocks in Production Networks
We examine the role of metals as economic inputs by using a production network model, calibrated for various countries using input-output (I-O) tables. Empirically, we employ local projections to study how metal shocks influence inflation, testing country-level heterogeneity in the sensitivity to these shocks. Our findings indicate that metals price shocks have significant and persistent effects on core and headline inflation, with particularly pronounced effects on countries that are highly exposed to metals in their production networks. This is in contrasts to oil supply shocks, which predominantly affect headline inflation. A shift of the global economy towards a higher relative metals intensity due to the energy transition could lead to commodity price shocks increasingly influencing core rather than headline inflation. This could make commodity price shocks less visible on impact but more persistent. Central banks should consider this shift when assessing inflation dynamics and risks.
Firms’ Resilience to Energy Shocks and Response to Fiscal Incentives: Assessing the Impact of 2022 Energy Crisis
The energy price shock in 2022 led to government support for firms in some countries, sparking debate about the rationale and the nature of such support. The results from nationally representative firm surveys in the United States and Germany indicate that firms in these countries were generally resilient. Coping strategies adopted by firms included the pass-through of higher costs to consumers, adjustment of profit margins (United States) and investments in energy saving and efficiency (Germany). Firms in energy-intensive industries would have been significantly more affected if international energy prices were fully passed through to domestic prices in Europe. Survey responses further reveal that most firms are uncertain about the impact of recent policy announcments on green subsidies. Firms take advantage of fiscal incentives to accelerate their climate-related investment plans are often those that have previous plans to do so. These findings suggest better targeting and enhancing policy certainty will be important when facilitate the green transition among firms.
World Economic Outlook, October 2024
The latest World Economic Outlook reports stable but underwhelming global growth, with the balance of risks tilted to the downside. As monetary policy is eased amid continued disinflation, shifting gears is needed to ensure that fiscal policy is on a sustainable path and to rebuild fiscal buffers. Understanding the role of monetary policy in recent global disinflation, and the factors that influence the social acceptability of structural reforms, will be key to promoting stable and more rapid growth in the future.
Australia’s Pandemic Exceptionalism
In many ways, Australia handled the COVID-19 pandemic as well as any country in the world – but what did we get wrong? Australia’s economic policy response to the pandemic was as effective as any other country’s – and dramatically better than most. Was this inevitable? Was it luck? Was it the product of great institutions? Or a few talented individuals? Conversely, Australia’s public health response was far more mixed – and disastrous in parts. While we bounded out of the blocks at the start, grave failings on vaccines and testing meant we stumbled, escaping the pandemic many months later than other countries and plunging us into unnecessary lockdowns. Lives were lost and livelih...
Euro Area Inflation After the Pandemic and Energy Shock: Import Prices, Profits and Wages
We document the importance of import prices and domestic profits as a counterpart to the recent increase in euro area inflation. Through a novel consumption deflator decomposition, we show that import prices account for 40 percent of the average change in the consumption deflator over 2022Q1 – 2023Q1, while domestic profits account for 45 percent. The increase in nominal profits was largest in sectors benefiting from increasing international commodity prices and those exposed to recent supply-demand mismatches. While the results show that firms have passed on more than the nominal cost shock, and have fared relatively better than workers, the limited available data does not point to a wide...
World Economic Outlook, October 2023
The latest World Economic Outlook reports signs that policy tightening is starting to cool activity despite core inflation proving persistent. Risks are more balanced as banking sector stress has receded, but they remain tilted to the downside. Monetary policy should stay the course to bring inflation to target, while fiscal consolidation is needed to tackle soaring debts. Structural reforms are crucial to revive medium-term growth prospects amid constrained policy space.
World Economic Outlook, April 2024
The latest World Economic Outlook reports economic activity was surprisingly resilient through the global disinflation of 2022–23, despite significant central bank interest rate hikes to restore price stability. Risks to the global outlook are now broadly balanced compared with last year. Monetary policy should ensure that inflation touches down smoothly, while a renewed focus on fiscal consolidation is needed to rebuild room for budgetary maneuver and to ensure debt sustainability. Structural reforms are crucial to revive medium-term growth prospects amid constrained policy space.
