Global Commodity Prices and Macroeconomic Fluctuations in a Low Interest Rate Environment
71 Pages Posted: 2 Mar 2021 Last revised: 23 Jul 2023
Date Written: January 8, 2021
Abstract
This paper takes a multi-country perspective to investigate the macroeconomic consequences of recessionary demand shocks when interest rates are low. Global demand shocks are recovered from a global commodity price factor that is shown to be highly representative of global demand conditions. Country-specific adjustments to these global commodity-based demand shocks are then estimated across 17 advanced economies using non-linear VARs. Domestic real GDP growth, equity returns, and inflation are significantly more sensitive to these shocks when nominal interest rates fall below a threshold of about 3%. When interest rates are low, recessionary commodity demand shocks lead to higher domestic real interest rates as nominal policy rates become constrained by the zero lower bound, consistent with a deflation trap driving the increase in domestic sensitivity to global shocks.
Keywords: Zero Lower Bound, Business Cycles, Commodities, Monetary Policy
JEL Classification: E30, E44, E52, F41, F44
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