An Empirical Investigation of the Nexus Among Money Balances, Commodity Prices and Consumer Goods Prices
The IUP Journal of Monetary Economics, Vol. IX, No. 4, November 2011, pp. 56-80
Posted: 22 Aug 2012
Date Written: August 21, 2012
This paper aims to identify the nexus between the excess of liquidity in the US and commodity prices over the period 1983-2006. Within a cointegrated vector autoregressive framework, the author investigates whether consumer prices and commodity prices react to excess liquidity, and if the different price elasticities of supply for goods and commodities allow for differences in the dynamic paths of price adjustment to a liquidity shock. The results show a positive relationship between real money and real commodity prices and provide empirical evidence for a stronger response of commodity prices with respect to consumer goods prices. This could imply that if the magnitude of the reaction is due to the fact that consumer goods prices are slow in reacting, then their long-run value can be predicted with the help of commodity prices.
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