Effects of Commodity Price Shocks on Inflation: A Cross Country Analysis

Using local projections, this paper investigates eects of commodity price shocks on in ation. We estimate impulse responses of the consumer price indexes (CPIs) to a commodity price shock, based on a monthly panel consisting of 120 countries. Our results from the local projections suggest that the CPIs are almost fully adjusted within a year in response to a commodity price shock and thus eects of commodity price shocks are transitory. We then explore the possibility that the responses of the CPIs may be dependent on the in ation regimes. Based on the smooth transition autoregressive models that use the past in ation rate as a transition variable, we nd that commodity price shocks have more persistent eects on in ation in the low in ation regime than in the high in ation regime. Our analysis also shows that, in the high in ation regime, there are (i) stabilizing roles of the exchange rate on consumer prices; and (ii) large dierences in price responses between developed and developing countries. However, these eects are not detected in the low in ation regime. Our ndings suggest that business cycle factors may play an important role in understanding eects of commodity price shocks on the CPIs.