Erratic monetary policy and the dispersion of commodity prices

This paper develops a closed economy macroeconomic model with many goods, where information flows are not instantaneous. Economic agents form rational expectations of future economic variables based on present information, and measure the future price level with a true cost-of-living index that allows for substitutions among commodities as relative prices change. The major inference drawn from our model is that, when information flows are imperfect, an increase in the variance of the money supply injects noise into economic agents forecasts of prices, and increases the equilibrium level of dispersion in commodity prices.     

Relative prices and the demand for money

This paper examines the validity of the conventional specification of money demand with particular reference to the issue of relative prices. It is shown that the conventional money demand function is based on the assumption of weak separability of money from commodities, which forms the basis for the absence of relative prices in money demand. Empirical and presumptive evidence suggests that weak separability is not tenable, implying that relative prices are important in money demand. The inclusion of commodity prices in money demand significantly affects the interest and income elasticity estimates. Finally, it is noted that the aggregate consumption function excluding commodity prices also has no theoretical and empirical base.     

中国货币市场运行:内生性、调整时滞与动态

固定利率制度下,价格成为货币市场失衡的调节机制;以结售汇为主要特征的汇率制度及其微观市场安排使得我国货币供给具有很强的内生性。在这个制度背景下,本文进一步考虑了我国货币和商品市场的调整时滞,建立了我国货币市场的动态系统理论模型,描述了我国货币市场的运行态势,并讨论了这种运行的含义。     

Hot Money Flows,Cycles in Primary Commodity Prices,and Financial Control in Developing Countries

Because the U.S. Federal Reserve’s monetary policy is at the center of the world dollar standard, it has a first-order impact on global financial stability. However, except during international crises, the Fed focuses on domestic American economic indicators and generally ignores collateral damage from its monetary policies on the rest of the world. Currently, ultra-low interest rates on short-term dollar assets ignite waves of hot money into Emerging Markets (EM) with convertible currencies. When each EM central bank intervenes to prevent its individual currency from appreciating, collectively they lose monetary control, inflate, and cause an upsurge in primary commodity prices internationally. These bubbles burst when some accident at the center, such as a banking crisis, causes a return of the hot money to the United States (and to other industrial countries) as commercial banks stop lending to foreign exchange speculators. World prices of primary products then collapse. African countries with exchange controls and less convertible currencies are not so attractive to currency speculators. Thus, they are less vulnerable than EM to the ebb and flow of hot money. However, African countries are more vulnerable to cycles in primary commodity prices because food is a greater proportion of their consumption, and—being less industrialized—they are more vulnerable to fluctuations in prices of their commodity exports. Supply-side shocks, such as a crop failure anywhere in the world, can affect the price of an individual commodity. But joint fluctuations in the prices of all primary products—minerals, energy, cereals, and so on—reflect monetary conditions in the world economy as determined by the ebb and flow of hot money from the United States, and increasingly from other industrial countries with near-zero interest rates.     

Financialization and commodity prices – an empirical analysis for coffee,cotton, wheat and oil

Commodity prices have crucial implications for developing countries. The question whether the financialization of commodity derivative markets has contributed to high and volatile commodity prices has been controversially debated. Building on limitations in the empirical literature, we estimate a multivariate Vector Autoregressive (VAR) model to assess the effect of different groups of financial investors (index investors and money managers) as well as fundamental and macroeconomic variables on the prices of coffee, cotton, wheat and oil. We find that, in contrast to index investors, money managers’ net long positions have a large statistically significant effect on commodity prices. This calls for policy interventions as commodity derivative markets may cease to perform their fundamental developmental roles.     

The Emergence of the Law of Value in a Dynamic Simple Commodity Economy

Abstract

A dynamic computational model of a simple commodity economy is examined and a theory of the relationship between commodity values, market prices and the efficient division of social labour is developed. The main conclusions are: (i) the labour value of a commodity is an attractor for its market price; (ii) market prices are error signals that function to allocate the available social labour between sectors of production; and (iii) the tendency of prices to approach labour values is the monetary expression of the tendency of a simple commodity economy to allocate social labour efficiently. The model demonstrates that, in the special case of simple commodity production, Marx's law of value can naturally emerge from multiple local exchanges and operate ‘behind the backs’ of actors solely via money flows that place budget constraints on their local evaluations of commodity prices, which are otherwise subjective and unconstrained.     

Search, Bargaining, Money, and Prices Under Private Information

This paper presents a model of money and search where bargaining determines prices and the quality of goods is private information. It studies how a lemons problem affects the purchasing power of money. There are multiple, Pareto-ranked equilibria. The superior equilibrium, where no lemons are produced, exists even if information about quality is relatively scarce. In other equilibria, there is price dispersion, and uninformed buyers pay higher prices than informed buyers for all goods. Taxing money balances (a proxy for inflation) makes buyers less selective, thus reducing the average quality of supply and the premium paid for known quality.     

Determinants of commodity prices

A panel of annual information between 1960 and 2006 for approximately 50 different commodity prices and some other variables and sources is used to tests the determinants of commodity prices. According to the evidence, interest rates seem to maintain a negative relationship with commodity prices.     

A note on uncertainty, liquidity, and stock prices

This paper presents theory and some empirical evidence on the relationship between the demands for money and stocks and bonds in the presence of changes in the volatility of money growth. Theoretically, it is shown that with variable velocity, an increase in the conditional variance of money growth triggers an increase in the demand for money relative to stocks and bonds with a consequent reduction in stock and bond prices. Empirically, the model only performs well in the dimension of stocks and bond prices moving in the same direction.     

Cross market predictions for commodity prices

This paper shows that commodity prices can be predicted from cross-market information by establishing long-run cross-market commodity price equilibrium models, which are characterized by a linear relation between prices across different markets. Using data from five representative commodity markets (oil, copper, gold, corn, and cattle) during the period 2005–2018, we demonstrate that oil and industrial metal markets have formed a long-run price equilibrium with other markets across different commodity families. However, agriculture and gold markets do not tend to have long-run price equilibrium relations with other commodity markets. Furthermore, we show that the absence of a price equilibrium is due to the cross-market liquidity interference effect. After we control for the liquidity effect, long-run cross-market commodity price equilibrium relations are reestablished for agriculture and gold markets. These results can aid in demonstrating that liquidity can capture most of the missing information that is not reflected in price dynamics in less liquid markets, such as agriculture and gold markets. Therefore, less liquid commodity price predictions require both prices and liquidity levels from cross-markets, while liquid commodity prices (oil and metal) can be predicted based solely on cross-market prices.     

Global Determinants of the Gold Price: A Multivariate Cointegration Analysis

The present paper follows publications which have investigated the influence of global liquidity developments on commodity prices and asset price indices. It contributes to the literature by analyzing how global developments in money, output, and inflation can be related to developments in gold prices in a long‐run perspective. Applying a multivariate cointegration (CVAR) analysis, this study investigates long‐run relationships between these variables. The results suggest a significant influence of excess global liquidity on real gold prices and a co‐movement of real gold prices and global inflation.     

Relative importance of sectoral and aggregate sources of price changes

This paper estimates a dynamic common factor model to assess relative importance of the aggregate and the sector-specific factors that determine changes in the prices of individual products. It also examines how aggregate price changes are affected by these factors. Two different specifications of the model are estimated: the baseline model with one aggregate factor, and a second specification with two aggregate factors. In the one-actor model, the aggregate factor contributes little to the movements of changes in prices, mostly of nondurable goods whereas it seems to have important contributions to the movements of changes in prices of commodity groups mainly used as intermediate or capital goods. In the specification with two aggregate factors, the additional factor has significant effects on changes in prices of ‘farm products’ and ‘processed foods and feeds’ only. Forecast-error variance decompositions of both aggregate and disaggregate price changes suggest that sectoral factors account for most of the variability at short horizons while the contributions of the aggregate factors increase as the time horizon lengthens. The results also show that sectoral factors are not only important for relative price changes but also have significant impact on aggregate inflation. The estimated common factors have statistically significant correlations with money growth and changes in the unemployment rate.     

Non-connectedness of the set of equilibrium money prices: The overlapping-generations economy

Consider the overlapping-generations economy with nominal taxes and transfers. Under some conditions, the set of equilibrium money prices is a non-negative interval. It has not been known whether this set can consist of two or more disjoint intervals. Three examples are provided here in which the set of equilibrium money prices is a non-connected set. The examples are for a finite-horizon balanced economy, an infinite-horizon balanced economy, and an infinite-horizon non-balanced economy.     

Demand system estimation in the absence of price data: an application of Stone-Lewbel price indices

This article evaluates the feasibility of estimating a system of demand equations in the absence of price information using the approach developed by Lewbel (1989). Stone-Lewbel (SL) price indices for commodity groups are constructed using information on the budget shares and the Consumer Price Indices (CPIs) of the goods comprising the commodity groups, which allows for household-level prices to be recovered. This study evaluates how susceptible are elasticities and marginal effects estimates from traditional parametric demand systems to the CPI used in the construction of the SL prices. To do this, three alternative regional CPIs are considered for the construction of the SL prices: monthly, quarterly and a constant (unity) price index. Elasticities and marginal effect estimates are computed for eight food commodity groups using the Exact Affine Stone Index (EASI) model as the parametric demand system and data from the United States Consumer Expenditure Survey. The estimates proved to be robust to the alternative regional CPIs considered in the construction of SL price indices, even to the absence of one. Hence, the results suggest that it is possible to accurately estimate a demand system even in the absence of price information.     

THE MONEY DEMAND FUNCTION FOR THE EURO AREA: SOME EMPIRICAL EVIDENCE

This paper sets out to re‐examine the money demand function for the euro area. Traditional specifications often yield unsatisfactory results: instability of short and long‐term coefficients; relatively large differences between estimated and actual value of variables; and significant changes in the number of long‐term relationships, etc. Using a standard Vector Error Correction Model, we find that the usual specification is indeed unstable. However, introducing a European equity price gives rise to a more stable system. Furthermore, recursive estimates confirm the relative stability of long‐term coefficients. Estimates of the real money gap, based on the money demand equation including equity prices, point to moderate, albeit persistent, excess liquidity in the euro area in recent years. The real money gap contains information about future inflation but this content may have diminished since 2001.     

Commodity prices and related equity prices

This paper shows that commodity‐sensitive stock price indices have strong power in predicting nominal and real commodity prices at short horizons (one‐month‐ahead predictions) using both in‐ and out‐of‐sample tests. The forecasts based on commodity‐sensitive stock price indices are able to significantly outperform naïve no‐change forecasts. For example, the one‐month‐ahead forecasts for nominal commodity prices reduce the mean squared prediction error by between 1.5% (for natural gas prices) and 20% (for copper prices). Moreover, the one‐month‐ahead directional forecast is found to perform significantly better than a 50:50 coin toss. As stock prices are not subject to revision, the proposed variable, which reflects timely and readily available market information, can potentially be a valuable predictor and thereby help to improve the accuracy of commodity price forecasts.     

Trade and Tradability: Exports, Imports, and Factor Markets in the Salter-Swan Model

We extend the Salter-Swan model to include both factor markets and semi-traded goods. In our model, changes in relative factor prices depend on changes in world commodity prices, factor endowments, and the trade balance. In contrast, only changes in world commodity prices can affect factor prices in the neoclassical trade model. The inclusion of semi-traded goods weakens the magnification effect in both the Stolper-Samuelson and Rybczynski theorems. When imports and domestic goods are poor substitutes, a characteristic of some commodities in developing countries, the sign of the Stolper-Samuelson theorem is reversed.     

RELATIONSHIPS AMONG STRATEGIC COMMODITIES AND WITH FINANCIAL VARIABLES: A NEW LOOK

We examine the comovements among the prices of four strategic commodities that have long, adequate daily series: oil, gold, silver, and copper as a group. We also explore their causal relationships with two commodity-relevant macrofinancial variables: interest and exchange rates as an expanded group to shed some light on the prediction behaviors of those individual commodity prices relative to the selected financial variables. In the expanded group, the selected interest rate can provide a transmission link between commodity prices and the dollar exchange rate. The results and their policy implications are discussed at length . ( JEL C51, E27, Q43)     

Data uncertainty and the role of money as an information variable for monetary policy

In this study, we perform a quantitative assessment of the role of money as an indicator variable for monetary policy in the euro area. We document the magnitude of revisions to euro area-wide data on output, prices, and money, and find that monetary aggregates have a potentially significant role in providing information about current real output. We then proceed to analyze the information content of money in a forward-looking model in which monetary policy is optimally determined subject to incomplete information about the true state of the economy. We show that monetary aggregates may have substantial information content in an environment with high variability of output measurement errors, low variability of money demand shocks, and a strong contemporaneous linkage between money demand and real output. As a practical matter, however, we conclude that money has fairly limited information content as an indicator of contemporaneous aggregate demand in the euro area.     

Money,nonconvex preferences,and the existence of equilibrium: A note

Nonconvexities play a major role in several theories of money. This note suggests an additional such role. In particular, an economy is presented which fails to have a competitive equilibrium in the absence of fiat money. When fiat money is present, a steady-state competitive, equilibrium does exist and has the feature that money necessarily has value. This is because in any steady state, monetary equilibrium relative prices are bounded in such a way that the discontinuous portions of excess demand functions may become irrelevant.