The Effect of Monetary Policy on Real Commodity Prices: A Re-examination

Abstract

In a recent paper, Jeffrey Frankel documents a negative and significantrelationship between real interest rates and real commodity prices. This paperdemonstrates that Frankel's results are open to question on methodological grounds. First,Frankel did not account for possible unit roots or cointegration in the data. When weestimate vector autoregressions and error-correction models on properlytransformed data,our results show few significant responses of commodityprice inflation to real interest ratechanges. Further, Granger causality tests reveal potential problems of endogeneity. Third,we find evidence of at least one structural break in the majority of our estimated systems.Finally, Frankel's use of annual rather than monthly data results in an artificial smallsample problem, exacerbating issues of testing and inference. When we account for theseissues, we find very little evidence of a relationship between monetary policy andcommodity prices. (E53, E31, C22)