Title: Commodity prices and the US money supply in the long run
Author: Samih Antoine Azar
Address: Faculty of Business Administration & Economics, Haigazian University, Mexique Street, Kantari, Beirut, Lebanon
Abstract: Theoretically commodity prices are expected to overshoot the money supply in the short run but to vary with unit proportionality in the long run. This follows from the observation that consumer prices are sticky and that commodity prices, set in auction markets are fully flexible. There is empirical evidence in the literature that commodity indexes are indeed anchored in the long run to the money supply with unit proportionality. However there is a dearth of research on the long-run behaviour of individual commodities with respect to the money supply. This paper fills this gap in the literature. When 48 individual commodity series and six commodity indexes series are studied over the monthly period 1980/2011, there is fairly strong evidence for unit proportionality to money supply. Individual regressions and panel regressions are both supportive of unit proportionality. The preconception that commodity prices move haphazardly is hence rejected.
Keywords: commodity price indexes; individual commodity prices; USA; United States; money supply; long-run proportionality; unit root tests; co-integration; error-correction models; long-run adjustment speed; panel unit root tests; panel co-integration.
Int. J. of Trade and Global Markets, 2012 Vol.5, No.3/4, pp.316 - 335
Submission date: 30 Mar 2012
Date of acceptance: 08 May 2012
Available online: 21 Oct 2012