Characterizing Monetary and Fiscal Policy Rules and Interactions when Commodity Prices Matter

Chuku Chuku and Paul Middleditch

Manchester School, 2020, vol. 88, issue 3, 373-404

Abstract: We examine the extent to which commodity price fluctuations matter for monetary and fiscal policy formulation in high primary commodity export economies. Markov mixture specifications of monetary and fiscal policy rules, stylized to account for commodity price slacks are estimated using specifically designed Bayesian techniques. We find that policymakers do indeed respond to commodity price slacks, and with varying degrees, depending on the policy regime in place and the country under investigation. Policy is characterized by distinctive episodes of active and passive policy regimes, driven by the response of monetary policy to inflation and the response of fiscal policy to past government debt. Moreover, monetary authorities fail to act aggressively enough to achieve announced inflation targets or to synchronize with fiscal authorities. The results hold implications for the correct specification of policy rules and interactions in DSGE models for these economies.

Date: 2020
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https://doi.org/10.1111/manc.12297

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Working Paper: Characterizing monetary and fiscal policy rules and interactions when commodity prices matter (2016)
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