Working Paper: CEPR ID: DP271
Authors: Thomas Moutos; David Vines
Abstract: The purpose of this paper is to provide a simple model which illuminates the interdependence between primary commodity prices and the rest of the economy. We study the role of commodity prices in a disinflation program, the role of commodity prices in determining whether or not a fiscal expansion is crowded out, and the effect on the manufacturing sector of the economy (i.e. that part of the economy described by a conventional macroeconomic model) of an exogenous increase in the supply of primary commodities. One of our main concerns is to draw an analogy between the roles of commodity prices and of exchange rates in all of the above processes.
Keywords: primary commodity prices; developed country economies; inflation; forward-looking expectations
JEL Codes: 300; 431; 711
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in commodity prices (Q02) | Wage-price process in the UK (E64) |
| Wage-price process in the UK (E64) | Inflation (E31) |
| Commodity prices (Q02) | Fiscal expansions crowding out private investment (E62) |
| Exogenous increase in the supply of primary commodities (Q02) | Manufacturing output (L60) |
| Exogenous increase in the supply of primary commodities (Q02) | Commodity prices overshooting new equilibrium (Q02) |