Did Easy Money in the Dollar Bloc Fuel the Global Commodity Boom?

43 Pages Posted: 1 Nov 2009

See all articles by Christopher J. Erceg

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Luca Guerrieri

Federal Reserve Board - Trade and Financial Studies

Steven B. Kamin

Board of Governors of the Federal Reserve System

Date Written: August 10, 2009

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: oil prices, SDGE models, monetary policy

JEL Classification: F41, F42

Suggested Citation

Erceg, Christopher J. and Guerrieri, Luca and Kamin, Steven B., Did Easy Money in the Dollar Bloc Fuel the Global Commodity Boom? (August 10, 2009). FRB International Finance Discussion Paper No. 979. Available at SSRN: https://ssrn.com/abstract=1496853 or http://dx.doi.org/10.2139/ssrn.1496853

Christopher J. Erceg (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2575 (Phone)
202-736-5638 (Fax)

Luca Guerrieri

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2550 (Phone)

Steven B. Kamin

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-3339 (Phone)
202-736-5638 (Fax)

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