Skip to main content
SpringerLink
Log in

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

  • Published:
Empirical Economics Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7

Similar content being viewed by others

Notes

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

  2. 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.

  3. 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).

  4. 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.

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

  6. 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.

  7. 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.

References

  • Assenmacher-Wesche K, Gerlach S, Sekine T (2008) Monetary factors and inflation in Japan. J Jpn Int Econ 22:343–363

    Article  Google Scholar 

  • Awokuse TO, Yang J (2003) The informational role of commodity prices in formulating monetary policy: a reexamination. Econ Lett 79:219–224

    Article  Google Scholar 

  • Bhar R, Hamori S (2008) Information content of commodity futures prices for monetary policy. Econ Model 25:274–283

    Article  Google Scholar 

  • Bodart V, Candelon B (2009) Evidence of interdependence and contagion using a frequency domain framework. Emerg Mark Rev 10:140–150

    Article  Google Scholar 

  • Bodenstein M, Guerrieri L, Kilian L (2012) Monetary policy responses to oil price fluctuations. IMF Econ Rev 60:470–504

    Article  Google Scholar 

  • Breitung J, Candelon B (2006) Testing for short- and long-run causality: a frequency-domain approach. J Econom 132:363–378

  • Candelon B, Cubadda G (2006) Testing for parameter stability in dynamic models across frequencies. Oxf Bull Econ Stat Suppl 741–760

  • Ciner C (2011a) Eurocurrency interest rate linkages: a frequency domain analysis. Int Rev Econ Financ 20:498–505

    Article  Google Scholar 

  • Ciner C (2011b) Commodity prices and inflation: testing in the frequency domain. Res Int Bus Financ 25:229–237

    Article  Google Scholar 

  • Cody BJ, Mills LO (1991) The role of commodity prices in formulating monetary policy. Rev Econ Stat 73:358–365

    Article  Google Scholar 

  • Furlong F, Ingenito R (1996) Commodity prices and inflation. FRBSF Econ Rev 2:27–47

    Google Scholar 

  • Garner CA (1989) Commodity prices: policy target or information variable? J Money Credit Bank 21:508–514

    Article  Google Scholar 

  • Geweke J (1982) Measurement of linear dependence and feedback between multiple time series. J Am Stat Assoc 77:304–313

    Article  Google Scholar 

  • Granger CWJ (1969) Investigating causal relations by econometric models and cross-spectral methods. Econometrica 37:424–438

    Article  Google Scholar 

  • Gronwald M (2009) Reconsidering the macroeconomics of oil price in Germany: testing for causality in the frequency domain. Empir Econ 36:441–453

    Article  Google Scholar 

  • Hosoya Y (1991) The decomposition and measurement of the interdependency between second-order stationary processes. Probab Theory Relat Fields 88:429–444

    Article  Google Scholar 

  • Hosoya Y (2001) Elimination of third-series effect and defining partial measures of causality. J Time Ser Anal 22:537–554

    Article  Google Scholar 

  • Kahn JA, McConnell MM, Perez-Quiros G (2002) On the causes of the increased stability of the U.S. economy. FRBNY Econ Policy Rev 8:183–202

    Google Scholar 

  • Mavrotas G, Kelly R (2001) Old wine in new bottles: testing causality between savings and growth. Manch Sch Suppl, 97–105

  • McConnell MM, Perez-Quiros G (2000) Output fluctuations in the United States: what has changed since the early 1980s? Am Econ Rev 90:1464–1476

    Article  Google Scholar 

  • Stock JH, Watson MW (2002) Has the business cycle changed and why? NBER Working Paper No. 9127

  • Toda HY, Yamamoto T (1995) Statistical inference in vector autoregressions with possibly integrated processes. J Econom 66:225–250

    Article  Google Scholar 

  • Verheyen F (2010) Monetary policy, commodity prices and inflation: empirical evidence from the US. Ruhr Economic Papers #216, Ruhr-Universitat Bochum

Download references

Acknowledgments

I am grateful to Professor Hiroshi Yamada for his invaluable help. I am also thankful to the editor and two anonymous referees for their valuable suggestions and comments. The usual disclaimer applies.

Author information

Authors and Affiliations

  1. School of Economics, Jiangxi University of Finance and Economics, No.169, East Shuanggang Road, Changbei, Nanchang, Jiangxi, China

    Yanfeng Wei

Authors
  1. Yanfeng Wei
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Yanfeng Wei.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Wei, Y. The informational role of commodity prices in formulating monetary policy: a reexamination under the frequency domain. Empir Econ 49, 537–549 (2015). https://doi.org/10.1007/s00181-014-0870-2

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00181-014-0870-2

Keywords

JEL Classification

Search

Navigation