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Monetary Policy Transmission Through Commodity Prices
Monetary policy influences inflation dynamics by exerting impact on a diverse array of commodity prices. At high frequencies, we show that a 10 basis points increase in US monetary policy rate reduces commodity prices between 0.5% and 2.5%, after 18 to 24 business days. Beyond the dollar appreciation channel, the effects are larger for highly storable and industrial commodities, consistent with the cost of carry and the expected demand channel. We then study the quantitative importance of the commodity-price channel of monetary policy on domestic and international inflation at longer horizons (6-36 months). The results indicate that the response of commodity prices—oil, base metals, and food prices—to monetary policy accounts for 47% of the total effect of US monetary policy on US headline inflation, and 57% of the effect of US monetary policy on other countries’ headline inflation. The commodity price channel on core inflation is smaller and mainly driven by base metal prices. Finally, the commodity-price channel of ECB monetary policy is smaller, and it mainly operates through its effect on energy prices.
Firms’ Resilience to Energy Shocks and Response to Fiscal Incentives: Assessing the Impact of 2022 Energy Crisis
The energy price shock in 2022 led to government support for firms in some countries, sparking debate about the rationale and the nature of such support. The results from nationally representative firm surveys in the United States and Germany indicate that firms in these countries were generally resilient. Coping strategies adopted by firms included the pass-through of higher costs to consumers, adjustment of profit margins (United States) and investments in energy saving and efficiency (Germany). Firms in energy-intensive industries would have been significantly more affected if international energy prices were fully passed through to domestic prices in Europe. Survey responses further reveal that most firms are uncertain about the impact of recent policy announcments on green subsidies. Firms take advantage of fiscal incentives to accelerate their climate-related investment plans are often those that have previous plans to do so. These findings suggest better targeting and enhancing policy certainty will be important when facilitate the green transition among firms.
Euro Area Inflation After the Pandemic and Energy Shock: Import Prices, Profits and Wages
We document the importance of import prices and domestic profits as a counterpart to the recent increase in euro area inflation. Through a novel consumption deflator decomposition, we show that import prices account for 40 percent of the average change in the consumption deflator over 2022Q1 – 2023Q1, while domestic profits account for 45 percent. The increase in nominal profits was largest in sectors benefiting from increasing international commodity prices and those exposed to recent supply-demand mismatches. While the results show that firms have passed on more than the nominal cost shock, and have fared relatively better than workers, the limited available data does not point to a wide...
Australia’s Pandemic Exceptionalism
In many ways, Australia handled the COVID-19 pandemic as well as any country in the world – but what did we get wrong? Australia’s economic policy response to the pandemic was as effective as any other country’s – and dramatically better than most. Was this inevitable? Was it luck? Was it the product of great institutions? Or a few talented individuals? Conversely, Australia’s public health response was far more mixed – and disastrous in parts. While we bounded out of the blocks at the start, grave failings on vaccines and testing meant we stumbled, escaping the pandemic many months later than other countries and plunging us into unnecessary lockdowns. Lives were lost and livelih...
Production Network Diversification and Economic Development
We provide empirical evidence and a theoretical analysis of the influence of production network diversification on countries' economic performance, reflected in their GDP per-capita levels. Using a panel sample of 55 countries, we find a strong positive association between the number of active links in the input-output network of a country and its GDP per-capita over time, even after controlling for several country characteristics. To complement and scrutinize our empirical finding, we advance economic theory on the link between network diversity and economic development by proposing a multisector model with input-output linkages, nonunitary elasticity of substitution in production, and a love of variety in the bundle of intermediate inputs that rationalize our empirical results. In the long run, when labor and intermediates are substitute inputs, denser production structures enjoy higher productivity in the intermediate input bundle, which generates a larger input-output multiplier that more strongly amplifies a given sequence of sectoral productivity. Hence, our model predicts that economies with denser production structures display higher income.
World Economic Outlook, October 2023
The latest World Economic Outlook reports signs that policy tightening is starting to cool activity despite core inflation proving persistent. Risks are more balanced as banking sector stress has receded, but they remain tilted to the downside. Monetary policy should stay the course to bring inflation to target, while fiscal consolidation is needed to tackle soaring debts. Structural reforms are crucial to revive medium-term growth prospects amid constrained policy space.
