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

Abstract

This paper takes a multi-country perspective to investigate the macroeconomic consequences of recessionary commodity shocks when interest rates are low. A global commodity factor is first recovered from a panel of 58 real commodity prices and this factor is shown to be significantly correlated with global demand. Country-specific adjustments to global commodity shocks are then estimated across 17 advanced economies using non-linear VARs. Negative commodity shocks are associated with substantially lower domestic real GDP growth, stock prices, and inflation when nominal interest rates fall below a threshold of about 3%. When interest rates are low, these commodity 'demand busts' induce higher real interest rates as nominal policy rates cannot sufficiently respond to disinflation, potentially worsening economic slowdowns.

Keywords: Zero Lower Bound, Business Cycles, Commodities, Monetary Policy, Quantitative Easing

JEL Classification: E30, E44, E52, F41, F44