An Examination of Linear and Nonlinear Causal Relationships between Commodity Prices and U.S. Inflation

By Mahadevan, Renuka; Suardi, Sandy | Economic Inquiry, October 2013 | Go to article overview

An Examination of Linear and Nonlinear Causal Relationships between Commodity Prices and U.S. Inflation


Mahadevan, Renuka, Suardi, Sandy, Economic Inquiry


I. INTRODUCTION

There is considerable literature on the use of commodity price information (particularly oil prices) in predicting economic activity and inflation. This, in large part, reflects the view that higher commodity prices, such as oil prices, in particular, tend to be followed by inflation and recessions (Barksy and Kilian 2002, 2004; Hamilton 2003). While much of the literature has focused on the oil price-macroeconomy relationship, policymakers and economists, for a long time, have been interested in the commodity-consumer price nexus, and increasingly so with the rise in inflation targeting as part of an objective of monetary policy. (1)

More recently, the inflation experience of the 2000s before the global financial crisis was attributed to rising prices for globally traded commodities. This event has generated a renewed interest on inflationary consequences of commodity prices despite considerable debate on the usefulness of commodity prices as a leading indicator for inflation. (2)

This study empirically examines the relationship between changes in commodity prices and inflation. Its contributions are fourfold. Firstly, we investigate the performance of a variety of commodity price indices as standalone indicators of inflation. We consider a myriad of Commodity Research Bureau (CRB) grouping indices including, among others, metals, raw industrials, textiles and fibers, livestock and products, and a composite index comprising all grouping indices. One reason for this is that by lumping together a diverse group of commodities, the indices could obscure their components' predictive power. This would be the case if some commodities were not good inflation predictors or if the timing of the inflation signals varied among different kinds of commodities. The results, by and large, indicate that the empirical link between commodity prices and inflation has changed dramatically over time, partly because of the changes in the extent to which movements in commodity prices reflect idiosyncratic shocks, and partly due to the change in macroeconomic fundamentals such as low inflation and lower uncertainty about future inflation and output growth that prevailed during the period of Great Moderation. Secondly, this article demonstrates that there is significant evidence of nonlinear causality between inflation and changes in metal and raw industrial price indices during the Great Moderation, even though this nonlinear causal relationship was absent prior to that period. As for other commodity price changes and inflation the degree of linear causal relationship has changed, albeit moderately, during the Great Moderation, supporting earlier studies of Whitt (1988), Furlong (1989), and Blomberg and Harris (1995). Thirdly, we show evidence that the nonlinear relationship is due primarily to the rate of information flow which occurs during periods of high volatility in these commodity prices in late 2000. This suggests that the widely documented linear relationship is more complex than initially thought. The existing research on the nature and sources of causal relationship between commodity prices and inflation has, to date, focused relatively on a linear causal relationship and has ignored the possibility of nonlinear causal relationship. This is surprising and indicates an important gap in this line of research given a priori that economic theory does not predicate a linear functional form for the relationship between changes in commodity prices and inflation.

Finally, on the methodology front, this study employs a robust approach for testing the presence of nonlinear causal relationship between commodity prices and inflation. One potential concern is that the nonlinear causality inferred from the Baek and Brock (1992) test may be affected by the presence of linear relations in the data. (3) For this reason, we fitted a vector autoregression (VAR) model to the data and apply the modified Baek and Brock test for Granger non-causality to the resulting residuals. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

An Examination of Linear and Nonlinear Causal Relationships between Commodity Prices and U.S. Inflation
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.