Commodity price volatility and U.S. monetary policy: Commodity price overshooting revisited

Abstract Commodity price volatility has created concerns for central bank policy‐makers. Recent commodity prices peaked in the consequences of the financial crisis of 2007, and they have remained relatively volatile since. As they are often seen as being connected in a cause and effect relationship with inflation and real output, the driving forces behind commodity price volatility are necessary for the conduct of monetary policy. Using an autoregressive moving average with an exponential generalized autoregressive conditional heteroscedastic (ARMA‐EGARCH) process, we extract the conditional variance series to find volatility spillover between monetary policy and commodity price index. The findings show that the volatility of agricultural commodity price index and other commodities price indices overshoot the long‐run equilibrium price in response to an impulse in monetary policy.