Business Intelligence

Global Relative Price Shocks: The Role Of Macroeconomic Policies

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Executive Summary

The authors use the multi-sector and multi-country G-Cubed model to explore the potential role of three major shocks - to productivity, risk premia and US monetary policy - to explain the large movements in relative prices between 2002 and 2008. They find that productivity shocks were major drivers of relative price movements, while shocks to risk premia and US monetary policy contributed temporarily to some of the relative price dispersions they observe in the data. The effect of US monetary policy shocks on relative prices was most pronounced in countries that fix their currency to the US dollar.

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