The Role of Commodity Prices in US Monetary Policy Transmission: Evidence from Local Projections and a Proxy-SVAR with Spillovers to Sweden

Sammanfattning

This study examines the role of commodity prices in the transmission of US monetary policy, both domestically and through spillovers to Sweden. Using high-frequency US monetary policy shocks identified from 1990 to 2023, we estimate impulse response functions through local projection regressions for 19 commodity futures and nine commodity price indices. A Proxy Structural Vector Autoregressive model, using the same shock series as an external instrument, quantifies the contribution of commodity prices to inflation. A 10 basis point surprise increase in the federal funds rate leads to accumulated declines in Brent oil and metal prices of 2.8% and 5.5%, respectively, over 22 days. In the United States, the contribution of these commodity categories to headline and core CPI over a twelve-month period is 56% and 30%, respectively. Extending the model to include Swedish inflation, we find that the same US monetary policy shock also has disinflationary effects in Sweden, with Brent oil and metal prices explaining 21% of the twelve-month decline in headline inflation, while core inflation remains unaffected. These findings underscore the importance of the commodity price channel in transmitting US monetary policy to inflation, providing new empirical evidence of its role in small open economies.