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

Since 2000s, large fluctuations in non-energy commodity prices have become a concern among policymakers about price stability. This paper investigates the effects of commodity price shocks on inflation with a monthly panel consisting of 120 countries. We show that the effects of commodity price shocks on inflation are transitory. While the effect on the level of consumer prices varies across countries, the transitory effects are fairly robust, suggesting that policymakers may not need to pay special attention to the recent fluctuations. Employing the smooth transition autoregessive models that use past inflation as the transition variable, we also explore the possibility that the effect of commodity price shocks is influenced by inflation regimes. In this speci cation, commodity price shocks may not have transitory effects when a country is less developed and its currency is pegged to the U.S. dollar. However, the effect remains transitory in developed countries with exchange rate flexibility