Effects of Mineral-Commodity Price Shocks on Monetary Policy in Developed Countries

This paper investigates effects of changes in mineral commodity prices on monetary policy. Using macroeconomic data from five developed countries (Australia, Canada and New Zealand as mineral-producing countries, and the US and the UK as non-mineral-resource countries), I estimate the impulse response functions of the policy interest rates and the core consumer price index (CPI) inflation rates to mineral-commodity price shocks. I find that, in response to an unexpected 10 percent increase in mineral commodity prices, the central banks in the mineral-producing countries are estimated to increase their policy interest rates by approximately one percentage point, and they seem to take anticipatory policy reactions to control core CPI variations triggered by these shocks. Thus, mineral commodity prices appear to be important determinants of the monetary policies in the mineral-producing countries. However, the effects of the increase in their policy interest rates on core CPI inflation are different across the examined mineral-producing countries. I also find that the central banks in the non-mineral- resource countries insignificantly respond to mineral-commodity price shocks because such price shocks have little impact on those countries’ core CPI inflation.