Global Commodity Prices and Macroeconomic Fluctuations in a Low Interest Rate Environment

71 Pages Posted: 2 Mar 2021 Last revised: 23 Jul 2023

See all articles by Rashad Ahmed

Rashad Ahmed

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

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

Suggested Citation

Ahmed, Rashad, Global Commodity Prices and Macroeconomic Fluctuations in a Low Interest Rate Environment (January 8, 2021). Available at SSRN: https://ssrn.com/abstract=3762699 or http://dx.doi.org/10.2139/ssrn.3762699

Rashad Ahmed (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

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Washington, DC 20219
United States

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