Commodities, Inflation and Monetary Policy

Transcription

1 Commodities, Inflation and Monetary Policy The Global Rise in Food Prices and the US Slowdown: Issues and Challenges in Monetary Policy Manuel Ramos-Francia Head of Economic Research June 16, 28

2 Outline 1. Real Food and Oil Price Changes 2. Implications for Monetary Policy 3. Monetary Policy in Mexico 4. Final Remarks

3 Real Food and Oil Price Changes Commodity Price Indexes (Index Jan 23 = 1) Non Fuel Food Metals (right axis) Crude Oil Source: IMF. 3 Apr-8 Jan-3 Apr-3 Jul-3 Oct-3 Jan-4 Apr-4 Jul-4 Oct-4 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8

4 1. Real Food and Oil Price Changes Food Mean per regime Real Food Price Changes (Annual % Change of Real Price) Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-1 Jan-3 Jan-5 Jan-7 Source: IMF. Calculations by Banco de México. 4

5 1. Real Food and Oil Price Changes 12 1 Volatility of Real Food Price Changes (Standard Deviation of the Annual % Change) Conditional s.d. Unconditional s.d. Percentage Points Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-1 Jan-3 Jan-5 Jan-7 Source: IMF. Calculations by Banco de México. 5

6 1. Real Food and Oil Price Changes Real Food Price Changes Proportion above Threshold Proportion of Time Above Threshold 1. Jan. 81 Apr. 86 May 86 - Dec Jan May 92 Jun Aug. 96 Sep May 2.6 Jun. 2 - Apr. 8.4 A.2 B Conditional Mean Mean Above Threshold A B Jan. 81 Apr. 86 May 86 - Dec. 88 Jan May 92 Jun Aug. 96 Sep May 2 Jun. 2 - Apr Threshold Threshold Source: IMF. Calculations by Banco de México. 6

7 1. Real Food and Oil Price Changes 2 15 Crude Oil Real Crude Oil Price Changes (Annual % Change of Real Price) Mean per regime Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-1 Jan-3 Jan-5 Jan-7 Source: IMF. Calculations by Banco de México. 7

8 1. Real Food and Oil Price Changes Regimes I Jan-81 Apr-86 II May-86 Dec-88 III Jan-89 May-92 IV Jun-92 Aug-96 V Sep-96 May-2 VI Jun-2 Apr-8 Regimes Mean Food (Annual % Change of Real Price) s.d. Max. Duration (months) Crude Oil (Annual % Change of Real Price) Mean s.d. Max. Duration (months) Period Period I Jan-81 Jan-87 II Feb-87 Jul-91 III Aug-91 Mar-99 IV Apr-99 Apr-8 8

9 Outline 1. Real Food and Oil Price Changes 2. Implications for Monetary Policy 3. Monetary Policy in Mexico 4. Final Remarks

10 2. Implications for Monetary Policy As is well-known (e.g. Clarida, Gali and Gertler (1999)), when obtaining the optimal monetary policy response to any shock, it is standard practice to use a linear-quadratic framework. Certainty equivalence holds. In this case, the optimal feedback rule for the monetary policy instrument will be a linear, timeinvariant function of all the variables and shocks. 1

11 2. Implications for Monetary Policy However, we are not currently in this type of framework: For many central banks, high inflation may be more costly than low inflation. The shocks we are currently facing, as shown, follow a complex stochastic process, with regime shifts, time varying variances and extreme values. In addition, there is uncertainty about the duration of the high inflation regimes in commodity prices. The economy seems to behave differently in recessions than in booms (e.g., Hamilton (1989)). Thus, optimal response of monetary policy is likely to be non-linear and time-varying, and will tend to focus on risk management. 11

12 2. Implications for Monetary Policy The optimal monetary policy response to increasing inflation depends on each country s particular circumstances: The inflationary history of the country and, in particular, the extent to which a low inflation equilibrium has been sustained. The degree of persistence that each economy s inflation process exhibits to price shocks. The weight that food and energy goods have on the CPI. The phase of the cycle the country is undergoing. The impact of the current environment on the country s terms of trade. 12

13 2. Implications for Monetary Policy Inflation Change and Low Inflation Regime Ven Nic Arg Ind Bol Jam Chi Gre HK Por Phil Ita Spa Pan Ire UK Can Fra USA Tai Kor Thai Sin Ger Jap Mal Change in Inflation from 25 to 27 Uru Par Ecu Bra Col Mex Bol Peru Sal Gua Duration of Low Inflation Periods (Years) Source: WEO, IMF. Calculations by Banco de México. 13

14 2. Implications for Monetary Policy Inflation Change and Inflation Persistence Change in Inflation from 25 to Ind Phi Uru Ven Sin Pan Nic HK Par Col Chi GerJap Ire Por Peru Ecu Mex Can UK Mal Tai Gre Ita Arg Kor USA Sal Spa Fra Gua Bra Tha CR Jam Bol Inflation Persistence Source: WEO, IMF. Calculations by Banco de México. 14

15 2. Implications for Monetary Policy Inflation Change and CPI Food Weights Change in Inflation from 25 to Sin Ger Ire Can UK Ita Por Mex Kor Fra USA Gre Spa Thai CR Bra Ven Chi Pan HK Jap Col Ecu Ind Tai Uru Arg Mal Par Nic Gua Phil Bol Peru Jam CPI Food Weight Source: WEO, IMF. Calculations by Banco de México. 15

16 2. Implications for Monetary Policy Cumulative Change in Policy Target Rates and Low Inflation Regime Cumulative Change in Policy Rate (Basis Points) Ind CR Uru Bra Col Gua Chi Per Gre HK Por Ita Spa IreFra Kor Ger Jap UK Mal Can Tha USA Mex Duration of Low Inflation Periods (Years) Source: WEO, IMF. Calculations by Banco de México. 16

17 2. Implications for Monetary Policy Cumulative Change in Policy Target Rates and Inflation Persistence Cumulative Change in Policy Rate (Basis Points) Ind Peru Uru HK Col Chi Gre Ire Spa Ger Por Mal Mex Kor Ita Jap UK Fra Thai Can USA CR Gua Bra Inflation Persistence Source: WEO, IMF. Calculations by Banco de México. 17

18 2. Implications for Monetary Policy Cumulative Change in Policy Target Rates and CPI Food Weights Cumulative Change in Policy Rate (Basis Points) Ger UK Uru Fra Col Kor Ita GreSpa Chi Ire Por Mex Jap Can Tha US CR Ind HK Mal Bra Gua Per CPI Food Weight Source: WEO, IMF. Calculations by Banco de México. 18

19 2. Implications for Monetary Policy Should increasing inflation from the current shocks to energy and food prices imply a restrictive bias in monetary policy? Could be in countries where inflation is persistent, a low inflation equilibrium has not been sustained for a long time and where food and energy have a large weight in consumers spending. This would reflect the high costs that a breakdown of expectations-based nominal anchors that sustain a lowinflation equilibrium may have on economic performance. Indeed, some countries may face a combination of the above mentioned features that may lead them to maintain a restrictive bias in their monetary policy, even when they may be currently facing the low phase of their business cycle. 19

20 Outline 1. Real Food and Oil Price Changes 2. Implications for Monetary Policy 3. Monetary Policy in Mexico 4. Final Remarks

21 Monetary Policy in Mexico CPI Inflation and Components (Annual % Change) Source: Banco de México. Headline Core Non Core 21 Jan-4 May-4 Sep-4 Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8

22 3. Monetary Policy in Mexico CPI Inflation Expectations for End 28, 29 and Average for the Next 4 Years (Annual %) End 28 End 29 Next 4 Years CPI Inflation, Inflation Expectations and Contractual Wages (Annual %) CPI Inflation 12-month Inflation Expectations Contractual Wages Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Source: Encuesta sobre las Expectativas de los Especialistas en Economía del Sector Privado of Banco de México. Source: Banco de Mexico. 22

23 3. Monetary Policy in Mexico Overnight Inter-bank Interest Rate (%) Jan-3 Jun-3 Nov-3 Apr-4 Sep-4 Feb-5 Jul-5 Dec-5 May-6 Oct-6 Mar-7 Aug-7 Jan-8 Jun Yield Curve in Mexico (%) Third quarter 27 Fourth quarter 27 First quarter Jun day months years Source: Banco de México. Source: Banco de México and PIP. 23

24 3. Monetary Policy in Mexico CPI Inflation Expectations for the Next 4 Years Banxico Infosel (%) Compensation for Inflation and Inflationary Risk on Long Term Bonds 1/ (%) Sep-3 Jan-4 May-4 Sep-4 Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-3 Jan-4 May-4 Sep-4 Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Source: Encuesta sobre las Expectativas de los Especialistas en Economía del Sector Privado of Banco de México and Infosel. 1/ Computed using nominal and inflation-indexed bonds. Source: Bloomberg. 24

25 3. Monetary Policy in Mexico Research by Cortés and Ramos-Francia (28) shows that shocks that are perceived to have a persistent effect on inflation (i.e. a persistent costpush shock) cause a steepening upward shift in the yield curve. The effect on medium and long-term yields results from an increase in expected future short rates and in risk premia. 25

26 3. Monetary Policy in Mexico Contemporaneous Response of Zero-Coupon Yield Curve to a Cost Push Shock (%) High Persistent Shock: Time-Varying Risk Premia High Persistent Shock: Constant Risk Premia Low Persistent Shock: Time-Varying Risk Premia Months 26

27 Outline 1. Real Food and Oil Price Changes 2. Implications for Monetary Policy 3. Monetary Policy in Mexico 4. Final Remarks

28 4. Final Remarks Some indicators suggest that this new high price environment may still remain for a long period of time. Thus, the risk of this environment having longer term inflationary consequences, by affecting inflation expectations and overall price setting mechanisms, is high. The issues raised above focus on the implications of this high inflation regime for monetary policy. 28

29 4. Final Remarks We have to ask to what extent we need to consider a broader view of the policy response that we should undertake, given this environment. In particular we need to ask: Which other policy instruments are available to face the current environment? What is the optimal mix of policy responses to this environment, in order to minimize negative effects on welfare? 29

30 Commodities, Inflation and Monetary Policy The Global Rise in Food Prices and the US Slowdown: Issues and Challenges in Monetary Policy Manuel Ramos-Francia Head of Economic Research June 16, 28