Commodity Prices: Policy Target or Information Variable?

By Garner, C. Alan | Journal of Money, Credit & Banking, November 1989 | Go to article overview

Commodity Prices: Policy Target or Information Variable?


Garner, C. Alan, Journal of Money, Credit & Banking


Commodity Prices: Policy Target or Information Variable?

The relationship between growth of the monetary aggregates and growth of nominal GNP has become less dependable in the 1980s. Deposit deregulation and large fluctuations in interest rates have produced sharp changes in the income velocity of money. These velocity shifts have, at times, caused the Federal Reserve to miss or modify its money growth ranges. Because of the undependable relationship between money growth and economic activity, some policymakers and economic analysts have argued that the Federal Reserve should pay more attention to commodity price fluctuations. This paper examines the proper role for commodity prices in the formation of monetary policy.

1. Recent Policy Proposals

Commodity price movements tend to precede changes in the general price level for at least two reasons. First, because primary commodities are important inputs into the production of manufactured goods, changes in commodity prices directly affect production costs and the general price level. Second, because many commodity prices are determined in auction markets, commodity prices respond more rapidly than the prices of manufactured goods and services to demand pressures or supply shocks. As a result, speculative purchases and sales of commodities can make commodity price inflation a leading indicator of the general inflation rate.

In the 1980s, some economists have advocated a policy role for commodity prices that differs from the traditional commodity standard. Under these proposals, the monetary authority would use conventional policy instruments to control either a broad commodity price index or the price of gold. Proponents of such a "commodity price rule" claim commodity prices are so closely related to the general price level that achieving the commodity price target would also control the general inflation rate. Unlike the traditional gold standard, the monetary authority would not intervene directly in commodity markets or maintain official commodity stocks. Instead, proponents believe commodity prices are so sensitive to monetary factors that conventional policy instruments, such as open market operations, could keep the commodity price variable within specified bounds.

Recent commodity price proposals have taken various forms. For example, Genetski (1982) recommended that the Federal Reserve be given a "range of discretion" for the growth of the monetary base. This range would, however, change automatically in response to movements of a commodity price index. Reynolds (1982) also advocated stabilizing spot commodity prices, especially the price of gold, and Wanniski (1983) wrote that "the price of gold, not the quantity of money, is the best leading indicator of future inflations and deflations." In contrast, Miles (1984) argued that the Federal Reserve should stabilize two financial auction market prices, a long-term bond yield and commodity futures prices.

Several U.S. policymakers have also supported an expanded role for commodity prices in monetary affairs. These policymakers have not advocated explicit commodity price targets, but have asserted that commodity prices deserve an important informational role. Federal Reserve Governor Wayne Angell (1987, p. 1) proposed a "commodity price guide to adjust short run money growth target ranges." In addition, Governor Robert Heller (1987, p. 14) stated that "paying more attention to commodity prices might help to anchor not only the domestic price level, but result in greater exchange rate stability as well."

Federal Reserve Vice Chairman Manuel Johnson recently said that commodity prices, along with other financial auction market variables, may be useful in evaluating the stance of monetary policy and assessing changes in inflation expectations. Johnson's list of monetary "indicators" also included the yield curve and the exchange rate. According to Johnson (1988, p. …

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

Items saved from this article

This article has been saved
Highlights (0)
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.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
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, APA and Chicago citation styles.

(Einhorn, 1992, p. 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.

Cited article

Commodity Prices: Policy Target or Information Variable?
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

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, 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."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.

    Author Advanced search

    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.