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Commodity Prices, Inflationary Pressures, and Monetary Policy: Evidence from BRICS Economies

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Abstract

We assess the transmission of monetary policy and the impact of fluctuations in commodity prices on the real economy for the five biggest and fastest growing emerging market economies: Brazil, Russia, India, China and South Africa (BRICS). Using modern econometric techniques, we show that a monetary policy contraction has a negative effect on output, suggesting that it can lean against unexpected macroeconomic shocks even when the financial markets are not well-developed in this group of countries. We also uncover the importance of commodity price shocks, which lead to a rise in inflation and demand an aggressive behaviour from central banks towards inflation stabilisation.

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Notes

  1. Taylor (2001) also emphasizes that exchange rate stabilization can help promoting output stabilization and bringing down inflation to a targeted level.

  2. For an analysis of the nexus between financial stability and monetary stability, see Granville and Mallick (2009), Martin and Milas (2010), Sousa (2010, 2012) and Castro and Sousa (2012).

  3. Interestingly, Vasicek (2011a) shows that the degree of inflation persistence is higher for new EU member states than for developed economies.

  4. The variance-covariance matrix of the residuals is decomposed using a triangular Choleski identification.

  5. We use CPI inflation in each country as an indicator of the dynamics of inflation in all countries except India, where WPI-based inflation is used as an indicator of consumer prices.

  6. Interestingly, Milas and Otero (2003) use a non-linear approach to model official and parallel exchange rates in a Latin American emerging market economy (Colombia). For China, Kubo (2009) investigates the role of quantity and price measures to achieve the equilibrium of the balance of payments and the stability of the financial system.

  7. In accordance with Esanov et al. (2005), who highlight the role of monetary aggregates as policy instruments, we also compute the impulse-response functions under this set up. They are both quantitatively and qualitatively similar to the ones displayed in Fig. 2a and are available upon request. For a review of the changes in the conduct of monetary policy in Russia, see Granville and Mallick (2010). For an interesting assessment of the bank lending channel in Russia, see Vinhas de Souza (2006).

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Authors and Affiliations

  1. School of Business and Management, Queen Mary University of London, Mile End Road, London, E1 4NS, UK

    Sushanta K. Mallick

  2. Financial Markets Group (FMG), London School of Economics, Houghton Street, London, WC2 2AE, UK

    Ricardo M. Sousa

  3. Department of Economics and Economic Policies Research Unit (NIPE), University of Minho, Campus of Gualtar, 4710-057, Braga, Portugal

    Ricardo M. Sousa

Authors
  1. Sushanta K. Mallick
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  2. Ricardo M. Sousa
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Correspondence to Sushanta K. Mallick.

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We gratefully acknowledge the constructive comments made by the Editor-in-chief, George S. Tavlas, and two anonymous referees of this journal.

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Mallick, S.K., Sousa, R.M. Commodity Prices, Inflationary Pressures, and Monetary Policy: Evidence from BRICS Economies. Open Econ Rev 24, 677–694 (2013). https://doi.org/10.1007/s11079-012-9261-5

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