Monetary Announcement and Commodity Price Dynamics: A Portfolio Balance Model

Abstract

This paper sets up a simple portfolio balance model and investigates how commodity prices will exhibit as the monetary authorities conduct a pre–announced monetary policy. It is found that agricultural prices will rise discretely on impact but may either overshoot or undershoot its long-run level at the instant of policy announcement. Our results also indicate that, during the period following the announcement but prior to the monetary expansion, rising agricultural prices are coupled with an accumulation in the stock of agricultural products. However, when monetary expansion actually takes place, two possible patterns of adjustment may happen: rising agricultural prices are matched by a decrease in the stock of agricultural products and falling agricultural prices are coupled with an accumulation in the stock of agricultural products.