Informational roles of commodity prices for monetary policy: evidence from the Euro area

This paper examines the linear and nonlinear causal relationships between commodity price indices and macroeconomic variables such as the consumer price index (CPI) and the industrial production index (IP) in the Euro zone. We use monthly time series data from January 1999 to December 2011 and employ a solid nonparametric, nonlinear causality test by Diks and Panchenko (2006) as well as the linear Granger causality test using Lag Augmented Vector Autoregression (LA-VAR) approach. Main findings of the study include: (i) Oil price only linearly Granger-causes the CPI and hence can be seen as a better information variable for the general price level than non-energy commodity price. (ii) There is a significant one-way linear causality from commodity price to IP. (iii) A significant nonlinear relationship between CPI and IP is identified by the nonparametric causality test. Such results are relevant for monetary policy makers who wish to mitigate the possible future inflation by using commodity or oil price indices as information variables.