Academic journal article Atlantic Economic Journal

Another Look at Commodity Price as a Policy Target

Academic journal article Atlantic Economic Journal

Another Look at Commodity Price as a Policy Target

Article excerpt

Commodity and final goods prices supposedly share the same underlying demand and supply forces and respond to the same stochastic shocks with possible stationary short-run deviations. Nevertheless, the cost-price transmission process might be disrupted due to nonmarket forces. Commodity and final goods prices might drift apart even in the long run upon a shock. Using standard cointegration tests, Garner [Journal of Money, Credit, and Banking, 1989, 21, pp. 50814] and Sephton [Journal of Money, Credit, and Banking, 1991, 23, pp. 260-6] document results showing that the Consumer Price Index (CPI) and a number of commodity prices indexes are not cointegrated. The standard cointegration tests are too restrictive and give only a dichotomous view on a system of variables. The authors reexamine the candidacy of commodity price as a monetary policy target by applying the comprehensive fractional cointegration and variance ratio tests on commodity price indexes and the CPI.

For comparison purposes, the authors use the same data as in Garner [1989] and Sephton [1991]. They are monthly price indexes for the CPI, the Commodity Research Bureau index of commodity prices, the Journal of Commerce index, and the Producer Price Index for crude materials from 1955:1 to 1987:4.

Fractional cointegration tests allow the error correction term from a system of variables to be fractionally integrated. …

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