Commodity Prices, Overshooting, Money Surprises, and Fed Credibility / Jeffrey A. Frankel, Gikas A. Hardouvelis.

Format:

Book

Author/Creator:

Frankel, Jeffrey A.

Contributor:

National Bureau of Economic Research.

Hardouvelis, Gikas A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1121.

NBER working paper series no. w1121

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1983.

Summary:

The general price level does not provide a sensitive indicator of whether monetary policy is tight or loose, because mostprices are sticky. Interest rates are free to move, but they are an ambiguous indicator of monetary policy: one does not know whether changes in the interest rate are due to changes in the expected inflation rate or the real interest rate.Commodity prices provide the ideal sensitive indicator.This paper has two distinct aims. First, a theoretical model of "over-shooting" in commodity markets is presented. A known change in the money supply is shown to cause an instantaneous change in commodity prices that is greater than the proportionate change that describes long-run equilibrium.Second, we take the occasion of the Fed's Friday money supply announcements to test the theory. We find that an unexpectedly large money announcement causes significant negative reactions in prices of six commodities. This supports at once the sticky-price or overshooting view, and the notion that the market has confidence in the Fed's commitment to correct any deviations from its money growth targets.

Notes:

Print version record

May 1983.