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[Table 3 about
here]
[Table 4 about
here]
[Table 5 about
here]
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corrections developed in Johansen (2002). The asymptotic
distribution of the rank test
statistic differs depending on the deterministic
components in the model and on almost any
type of dummy variable3. Therefore, the safest procedure
is to simulate the new critical
values. Table 6 presents the Trace test results with the
Bartlett corrections and the simulated
critical values.
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panel picks up the non-constancy at the beginning of the
recursions. However, it should be
noted that the R-form looks stable in all , meaning that
the instability is only in the short-run
coefficients. In general, the eigenvalue fluctuation
tests provide a fair picture.
[Figure 6 about
here]
[Table 7 about
here]
[Table 8 about
here]
4.7. Weak Exogeneity and Pure Adjustment
The matrix gives preliminary evidence of weak
exogeneity. If a variable is weakly
exogenous, the coefficients in the rows must be
insignificant; in other words, it represents a
pushing force. The only variable that seems not to react
to any other variables is the real
money.
The formal LR-test for weak exogeneity in Table 9
shows that both real GDP and real
money are weakly exogenous at 10% significance level,
even though the joint exogeneity is
rejected. It has been decided to carry out the analysis
including them in the system in order to
analyze their impact in the matrix.
[Table 9 about
here]
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[Table 10 about here]
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and real GDP, negatively between inflation and real money
and positively between the two
interest rates) and this would suggest a simultaneous
specification of the model. Nonetheless,
such analysis has not been pursued because of the
problems in determining the direction of
the causation between the mentioned variables.
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5. Conclusions
Commodity prices are currently seen as one or the
main source of current inflationary
pressures and there seems to exist, as discussed by
Frenkel (2006), a linkage between
increases in commodity prices in commodity exporting
countries and monetary policy
changes in advanced industrial economies. This, as
suggested, would defy the common
knowledge that changes in commodity prices are solely
impacted by developments occurring
in the commodity markets.
The aim of the paper is to identify the nexus
between the excess of liquidity in the US
and commodity prices over the period 1983-2006 within a
cointegrated VAR framework and
in particular at testing whether the commodity prices
react more powerfully than the
consumer goods' prices to changes in real money balances.
The results provide empirical evidence on the
magnitude of the reaction of
commodity and consumer goods' prices to an increase in
real money. In particular, a long-run
equilibrium relationship between real money and real
commodity prices has been found, with
an effect from real output. The two variables of interest
show positive and significant
correlation.
Moreover, real money seems to be a weakly
exogenous variable and therefore is a
pushing force (away from the equilibrium), whereas real
commodity prices are the only
equilibrium correcting variable to such cointegration
relationship, or pulling force.
Therefore, in order to restore the long-run
equilibrium when there is a real excess
(lack) of liquidity, the real commodity prices need to
increase (decrease). Such increase
(decrease) can be achieved through an increase (decrease)
in the commodity prices stronger
(smaller) than the increase (decrease) in the consumer
goods' prices, generating a larger
spread between the two.
The results have important policy implications.
More specifically, if the magnitude of
the reaction is due to the fact that consumer goods'
prices are slower to react, then their long-
run value can be predicted with the help of the commodity
prices. In other words, the extent
of the rise in the commodity prices acts to predict
subsequent changes in the price of the other
goods, namely the consumer goods, whose price is
initially unchanged.
Moreover, the results also support the idea that
monetary policy cannot only focus on
the core CPI and ignore developments in the commodity
market. In fact, if commodity prices
are very high it might be the case that monetary policy
is loose; therefore they should be
taken into account as a useful monetary indicator. This
conclusion is particularly relevant to