ESRI Discussion Paper Series No.331
Effects of Commodity Price Shocks on Inflation: A Cross-Country Analysis

Atsushi Sekine
Faculty of Political Science and Economics, Waseda University
Takayuki Tsuruga
Economic and Social Research Institute (ESRI)


Since the 2000s, large fluctuations in commodity prices have become a concern among policymakers regarding price stability. This paper investigates the effects of commodity price shocks on headline inflation with a monthly panel consisting of 144 countries. We show that the effects of commodity price shocks on inflation are transitory. While the effect on the level of consumer prices varies across countries, the transitory effects are fairly robust, suggesting a low risk of the so-called second-round effect on inflation. Employing the smooth transition autoregressive models that use past inflation as the transition variable, we also explore the possibility that the effect of commodity price shocks could be persistent, depending on inflation regimes. In this specification, commodity price shocks may not have transitory effects when a country's currency is pegged to the U.S. dollar. However, the effect remains transitory in countries with exchange rate flexibility.

  • JEL Classification: E31, E37, Q43
  • Keywords: Commodity prices, inflation, pass-through, local projections, smooth transition

Structure of the whole text(PDF-Format 1 File)

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  2. page1
  3. page2
    1 Introduction
  4. page4
    2 Estimating IRs from local projections
    1. page4
      2.1 Benchmark regressions
    2. page6
      2.2 Commodity price shocks
    3. page7
      2.3 Data
  5. page8
    3 Main results
    1. page8
      3.1 IRs from the benchmark estimation
    2. page10
      3.2 Comparisons to the standard approach
    3. page11
      3.3 Allowing for cross-country differences in IRs
      1. page11
        3.3.1 Economic factors affecting IRs
      2. page14
        3.3.2 Results using the dummy variables
    4. page15
      3.4 Robustness of the transitory effect of commodity price shocks
      1. page16
        3.4.1 Alternative commodity price indexes
      2. page16
        3.4.2 Specifications of forecasting equations
  6. page17
    4 Evidence from the STAR model
    1. page17
      4.1 Estimation
    2. page19
      4.2 Results from the STAR models
  7. page20
    5 Conclusion
  8. page21
  9. page25
    1. page25
      Table 1: List of Countries
    2. page26
      Table 2: Comparisons of estimation methods
    3. page27
      Table 3: Estimates of gammaUSD,k, gammaIT,k, gammaLDC,k, and gammaTO,k based on the local linear projection with dummy variables
    4. page28
      Table 4: Variability of inflation responses: Differences across specifications
    5. page29
      Table 5: Results of a grid search for the STAR models
    6. page30
      Table 6: Variability of inflation responses: Differences across country groups
    7. page31
      Table 7: Tests for the equality of impulse responses between the high- and low-inflation regimes
  10. page32
    1. page32
      Figure 1: Commodity price inflation and the estimated commodity price shocks
    2. page33
      Figure 2: Impulse responses of the CPI: Benchmark regressions
    3. page34
      Figure 3: Impulse responses of the CPI with interaction terms
    4. page35
      Figure 4: Impulse responses of the CPI with interaction terms: High- and low-inflation regimes
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