The Role of Commodity Prices in Formulating Monetary Policy

Commodity prices often provide signals about the future direction of the economy, especially inflation. It has been argued, therefore, that the information in commodity prices should be used in formulating monetary policy. This paper investigates whether a systematic monetary policy response to contemporaneous commodity price shocks would have helped stabilize the postwar U.S. economy. The authors' findings suggest that responding to unexpected commodity price movements would have lowered the average rate of inflation and reduced its variability, while the path of real growth would be relatively unchanged. Copyright 1991 by MIT Press.