Time Series Modeling of Dynamic Responses of Commodity Prices to Monetary Policy Shocks in Ghana

Ernest Yeboah Boateng,Isaac Christopher Otoo,Paul K Yeboah,Joseph Otoo

doi:10.4236/jfrm.2020.94020

Abstract

The Vector Error Correction (VEC) model was used to assess the impact of monetary policy rate on commodity prices in Ghana. Monthly data on monetary policy rate, commodity prices of cocoa, gold and crude oil from January 2005 to December 2017 obtained from the Bank of Ghana was used for the study. The estimated VEC model aided in establishing long and short run relationships between monetary policy rates and the major commodity prices in Ghana. The study revealed that in the long run, monetary policy rates are negatively correlated to crude oil prices, positively correlated to both cocoa prices and gold prices but to a little extent. It was also evident from the study that in the short run, the first lag of monetary policy rate is negatively related to itself and the second lag of monetary policy rate is positively related to itself. Additionally, the first and second lagged periods of cocoa price have positive influence on monetary policy rate in the short run, but the first and second lagged periods of gold price have negative influence on monetary policy rates in the short run. The Granger causality test also reveals that the movement of cocoa prices in Ghana can be explained to cause the movement of monetary policy rates and gold prices in short run. A positive shock in monetary policy rate will have a positive and persistent effect on itself. Likewise, positive shock in monetary policy rate will have a positive and persistent effect on cocoa prices. The response generated from a positive shock on monetary policy rate has a persistent and decreasing effect on both crude oil and gold prices.

Highlights

The development of commodity prices has been one of the major foundations of concern for policy makers during the past decades
It was evident from the study that in the short run, the first lag of monetary policy rate is negatively related to itself and the second lag of monetary policy rate is positively related to itself
The model reveals that in the long run, monetary policy rates are negatively correlated to crude oil prices, when crude oil prices increases 1%, the monetary policy rates fall by 0.22%; monetary policy rates are positively correlated to cocoa prices but to a little extent, when cocoa prices increases 100%, the monetary policy rates increase by 0.06%; and monetary policy rates are positively correlated to gold prices but to a little extent, when gold prices increases 10%, the monetary policy rates increase by 0.08%

Summary

Introduction

The development of commodity prices has been one of the major foundations of concern for policy makers during the past decades. From unindustrialized countries to developed markets around the world, commodity prices have a great influence on the undercurrents of economic activity. Their intercontinental trade represents one-quarter of the world’s merchandise exchange (Thomasz, Massot, & Rondinone, 2016). A hefty share of unindustrialized world’s GDP comes from commodity related activities. Both long-term trends and short-term fluctuations in commodity prices are key determinants of exchange rates, prices, national income and the balance of payments (Blanchard & Gali, 2007). In nations with low monetary policy standing where the share of commodities in the consumption basket is great, food and fuel price shocks might raise expectations of larger inflation in the future (Bleaney & Greenaway, 1993)

Methods

Results

Conclusion