Misinterpreting commodity price swings can be damaging – BIS paper
Whether movements are down to supply shocks or changes in global demand matters for policy
Central banks risk policy mistakes if they fail to distinguish the driving forces behind movements in commodity prices, a working paper published by the Bank for International Settlements says.
Misdiagnosing the source of a shock as global supply can lead central banks to employ the “conventional wisdom” of looking through the initial impact and responding only to second-round effects such as wages and inflation expectations. This can be less than optimal if the source was actually global
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