Commodity Price Volatility and U.S. Monetary Policy: Commodity Price Overshooting Revisited
27 Pages Posted: 9 Oct 2017
Date Written: October 9, 2017
Commodity price volatility can create concern for central bank policy-makers. Recent commodity prices peaked in the aftermath of the financial crisis of 2007, and they have remained relatively volatile since. As they are often seen as being connected in a cause and effect relationship with inflation and real output, the driving forces behind commodity price volatility are crucial for the conduct of monetary policy (Svensson, 2005). Using an autoregressive moving average with an exponential generalized autoregressive conditional heteroscedastic (ARMA-EGARCH) process, we extract the conditional variance series to identify volatility spillovers between monetary policies and commodity price index. The findings show that the volatility of agricultural commodity price index and other commodities price indices overshoot their long-run equilibrium in response to an impulse in monetary policy.
Keywords: Monetary Policy, Commodity Prices, Overshooting Hypothesis, ARMA-EGARCH Model, VECM Approach
JEL Classification: C22, E52, O23, Q02
Suggested Citation: Suggested Citation