Did easy money in the dollar bloc fuel the global commodity boom?

Christopher Erceg, Luca Guerrieri and Steven B. Kamin

No 979, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Among the various explanations for the runup in oil and commodity prices of recent years, one story focuses on the role of monetary policy in the United States and in developing economies. In this view, developing countries that peg their currencies to the dollar were forced to ease their monetary policies after reductions in U.S. interest rates, leading to economic overheating, excess demand for oil and other commodities, and rising commodity prices. We assess that hypothesis using the Federal Reserve staff?s forward-looking, multicountry, dynamic general equilibrium model, SIGMA. We find that even if many developing country currencies were pegged to the dollar, an easing of U.S. monetary policy would lead to only a transitory runup in oil prices. Instead, strong economic growth in many developing economies, as well as shortfalls in oil production, better explain the sustained runup in oil prices observed until earlier this year. Moreover, a closer look at exchange rates and interest rates around the world suggests that the monetary policies of many developing economies, including in East Asia, are less closely influenced by U.S. policies than is frequently assumed.

Keywords: Monetary policy; Petroleum products - Prices (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-ene, nep-mon and nep-sea
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Citations: View citations in EconPapers (2)

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