The Impact of Raw Materials Prices on the Interest Rate

Graf Lambsdorff, Johann Article The Impact of Raw Materials Prices on the Interest Rate Zeitschrift für Wirtschafts- und Sozialwissenschaften (ZWS) - Vierteljahresschrift der Gesellschaft für Wirtschafts- und Sozialwissenschaften, Verein für Socialpolitik Provided in Cooperation with: Duncker & Humblot, Berlin Suggested Citation: Graf Lambsdorff, Johann (1999) : The Impact of Raw Materials Prices on the Interest Rate, Zeitschrift für Wirtschafts- und Sozialwissenschaften (ZWS) - Vierteljahresschrift der Gesellschaft für Wirtschafts- und Sozialwissenschaften, Verein für Socialpolitik, ISSN 0342-1783, Duncker & Humblot, Berlin, Vol. 119, Iss. 2, pp. 173-189, https://doi.org/10.3790/schm.119.2.173 This Version is available at: https://hdl.handle.net/10419/291930 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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Sozialwissenschaften (ZWS) 119 (1999), S. 173-189 Duncker & Humblot, Berlin The Impact of Raw Materials Prices on the Interest Rate* By Johann Graf Lambsdorff1 1. Introduction The market for raw materials can be regarded as highly sensitive to political forces. Warfare, disputes over property rights, questions of international coordination and the building of cartels are important factors of influence which are typically regarded exogenous to macroeconomic analysis. Although it is acknowledged that the question of causality between macroeconomic aggregates (such as production and commodity prices) and raw materials prices is still open to debate,2 this paper concentrates on one side of this causality: The question of how raw materials prices are impacting on the macroeconomy. The macroeconomic influence of raw materials prices has first been investigated after the embargo of the OPEC-countries in 1973 considerably increased oil prices. There is consensus among economists that an increase of raw materials prices leads to stagflation, i.e. rising commodity prices and decreasing production and income in industrial countries. The same consensus cannot be found with respect to the (nominal) interest rates. In simulation studies involving various macroeconometric models (Hickman 1987, 159) reports about 4 studies to favor decreasing interest rates and 9 to argue on behalf of increasing interest rates in response to rising raw materials prices. The economic modeling in (Phelps 1978, 210) and (Wilcox 1983, 46) also brings about a negative correlation between the two variables. Likewise, the emphasis on recessive demand side effects in (Sachs 1982) and (Hamilton 1988) implies an oversupply on the capital market with decreasing interest rates, although this is not explicitly stated there. In contrast to such conclusions other contributions emphasize supply side effects and argued in favor of a positive correlation. * Verantwortlicher Herausgeber/editor in charge: W. K. 1 I am grateful to H.-J. Jarchow, H. Möller, J. Müller, M. Meurers, two anonymous referees and the participants of workshops at the "Institut für Statistik und Ökonometrie" and the "Institut für Geld und Währung", Göttingen University, for helpful comments. 2 See e.g. (Hooker 1996) and (Hamilton 1996). ZWS 119 (1999) 2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.119.2.173 | Generated on 2023-04-04 12:25:59 174 Johann Graf Lambsdorff The principal contribution of this paper is to develop a macroeconomic model which consistently incorporates the manifold influences raw materials prices exert on the economy. Crucial determinants are kept variable, such as the elasticity of substitution, returns to scale, wage rigidity and the capital stock. This allows us to derive robust conclusions which are valid for a broad range of different economies. Also, this approach allows for many conclusions for macroeconomic modelling which lie beyond the scope of this paper. Only minor restrictions are needed to keep the model manageable and the outcome understandable. By doing so the paper will shed light on the relationship between interest rates and raw materials prices and present theoretical arguments for a positive correlation between the two. The paper is organized as follows. Section 2 lists the potential impact of raw materials prices on the interest rate, section 3 develops a model which allows for a comparison of the multitude of these effects. Making use of a CES-production function, the model puts special emphasis on deriving the supply side and consistently incorporating the demand side into the analysis. Above this, particular precaution is taken to formulate an adequate model for the world economy as opposed to a small open economy. While incorporating a variable capital stock, our final results turn out to be close to a simple Keynesian model. Our proposition is that rising raw materials prices will lead to an excess demand on the capital market and to rising interest rates. Section 4 concludes by presenting a possible application of our findings, referring to central bank policies. Some economists propose an interest rate target for central bank policies in contrast to money stock targeting. This is justified if output stability is preferred to price stability. Rising raw materials prices lower production and raise the commodities price index and the interest rate. Interest rate targeting now requires an expansionary monetary policy, raising output and the price level. Whereas output fluctuations are subsequently stabilized, the volatility of the price level will inevitably increase. 2. Identifying Channels of Influence The interest rate is determined on the capital market, bringing into equilibrium macroeconomic savings and investments.3 Determining interest rate reactions thus requires determining the effects of raw materials prices on 3 Given the Keynesian approach taken here and its focus on a liquidity preference theory of interest rates, a rising interest rate has a direct negative effect on investments. To a lower extent, savings are affected negatively via the Keynes-effect on output. ZWS 119 (1999)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.119.2.173 | Generated on 2023-04-04 12:25:59 Impact of Raw Materials Prices on the Interest Rate 175 savings and investments. A variety of such impacts can be found in the literature. These can be subsumed under the following descriptions:4 Scale Effect on Savings: Rising raw materials prices raise the costs of production and induce a reduction of the production level. Less income is generated in the production process, lowering the level of savings according to the marginal propensity to save. Scale Effect on Investments: Investments can be assumed to depend on current or on future production levels. With production costs rising and the production level decreasing due to increased raw materials prices also investments will be lowered. Cross-Price Effect: The input of raw materials is lowered in reaction to rising raw materials prices. This may impact on the marginal returns to capital. Whereas (Tatom 1991) and (Hutchison 1991) propose that substitution possibilities (although limited) imply a positive cross-price elasticity the opposite is expressed by (Wilcox 1983, 47), (Hamilton 1988) and (Phelps 1978, 210). They argue that the marginal returns to capital are lowered as a consequence of limited substitution possibilities. We may hence either obtain a positive or a negative cross-price effect on the capital stock. Income-Shift Effect: Rising raw materials prices shift income from industrial countries to raw materials exporting countries. Assuming exports of the commodity to be exogenous, this reduces total demand on the international commodity market. Given a certain production level this increases savings.5 Inflation Expectations Effect: Rising commodity prices as a response to increasing raw materials prices may lead to expectations of rising inflation. Investments may increase due to decreasing real interest rates.6 We will argue that while the scale effect on savings dominates the scale effect on investments there are no convincing reasons to assume the existence of an income-shift effect and a cross-price effect. This leads straightforward to the conclusion of a rising nominal interest rate in response to rising raw materials prices. An increase of the nominal interest rate might be further fuelled temporarily by the inflation expectations effect. 4 See (Rasche and Tatom 1981, 10) and (Herberg, Hesse and Schuseil 1982, 113) for som of the macroeconomic effects mentioned. 5 This effect corresponds to what is the "demand effect" in the commodity market, see (Sachs 1982, 245) and (Tatom 1991, 5). (Hutchison 1991, 11) and (Hickman 1987, 139) point to the fact, that income is only shifted. The term "income-shift effect" appeared more appropriate therefore. The rise of savings occurs on the part of the raw materials exporters. These savings are channeled back into the capital markets. This has been called financial recycling by (Corden and Oppenheimer 1976, 30). 6 This effect is also mentioned in (Hutchison 1991, 15). ZWS 119 (1999) 2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.119.2.173 | Generated on 2023-04-04 12:25:59 176 Johann Graf Lambsdorff 3. The Model The following model presumes a bipartite world: An industrialized region faces a raw materials exporting region. The production of the industrial countries is dependent on the import of raw materials whereas the exporters of raw materials do not own facilities for producing the commodity and import the commodity from the industrialized countries. 3.1. The Supply Side Central to our investigation is the use of a rather general production function for the industrial countries' commodity. We will assume a CES- production function, which is known to incorporate a Cobb-Douglas and a limitational production function as special cases. By doing so we do not restrict the model to a specific value for the elasticity of substitution nor a particular value for the returns to scale. The advantage of this general approach is to derive results which are robust to a large variety of macroeconomic situations: (1) Q = (aiN~p + a2R~p + p > 0, 0 < fjt < 1, + a2 + <*3 = l7. Q is the total real gross production (quantity) of the industrial countries, N indicates labor, R the imported raw material and K physical capital. The elasticity of substitution a is determined by p according to a = Since p > 0 the analysis presupposes a < 1, i.e. the realistic assumption of a low elasticity of substitution of the input factors. Given the conditions of perfect competition, we will determine production (Q) as a function of the factor prices. The optimality conditions are:8 (2) (3) \10L 1 Q_2_ N 1+ p ' w : p ' Q1 9 p ' 7 The term fi represents the returns to scale, see (Bhandari and Turnovsky 1984, 172) and (Varian 1984, 30). A more complicated model has been introduced by (Marston and Turnovsky 1985) which includes domestic value-added instead of labor into the function, whereas value-added is determined by a Cobb-Douglas-function, incorporating labor and capital. Extensions like this however do not contribute further to our analysis. 8 See (Lambsdorff 1994, 28-29). 9 Since raw materials are denominated in dollars, for countries other than the USA there has to be the exchange rate considered, see (Bhandari 1981, 335-336), (Bhan- ZWS 119 (1999)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.119.2.173 | Generated on 2023-04-04 12:25:59 Impact of Raw Materials Prices on the Interest Rate 177 Pk P ' Apparently, factor inputs in relation to overall production are negatively associated with the relative factor prices. In order to smoothly incorporate the supply side into demand side conditions, we impose the extreme assumption that physical capital is fully depreciated in the course of the production process. This can be justified by assuming the relevant period to be sufficiently long. Certainly, this restriction appears to be rather strong. However, it must be valued against the standard short-term macroeconomic assumption of a constant capital stock. Such a model would not allow substitution between capital and raw materials and thus neglect potentially important effects of raw materials price changes. At the same time, our results can largely be reproduced under the assumption of a constant capital stock.10 Thus, while our results are also valid in the short-term with a constant capital stock, the incorporation of substitution possibilities makes our model more fruitful for our special purpose. Since only one product is produced, the price of the physical capital equals that of the commodity (Q). However, we assume that producers' liquidity constraints force them to finance the capital stock via the capital market and that the acquisition of capital takes place one period in advance of production. With a price level in period t, Pt, and an interest rate, it, the real costs of capital in period 0 are: — = (1 + i-\) — = (1 + i-i)(l - TTO), Pt-Pt i P° Po with 7rt = —-— being the rate of inflation with respect to the current price level. Determining the optimal level of physical capital in period 1, the producers will form expectations concerning the inflation rate, denoted by an asterisk. Assuming zero inflation at the outset this implies for period 1: d^yj = di - (1 + io)dir*. Note, that this notation introduces a dynamic element into our static analysis: Changes of the price level in period 1 will affect the real costs of capital. However, this dynamic element is exogenous to our static model. dari and Turnovsky 1984, 156), (Jarchow 1992, 2) and (Wohltmann 1993, 558). However, given assumptions of symmetry for the industrial countries, the exchange rate does not react to raw materials price changes and can be omitted in the equation. The opposite opinion was expressed in (Bhandari 1981, 346). But embedded into a two or three country model, his conclusion proves to be wrong, see (Wohltmann 1993, 24) and (Lambsdorff 1994, 60). 10 Introducing the standard assumption that long-term considerations determine capital demand, all other functions remain the same. It can easily be seen that the crucial results remain unaffected. ZWS 119 (1999)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.119.2.173 | Generated on 2023-04-04 12:25:59 178 Johann Graf Lambsdorff Dividing (2) and (4) by (3), we obtain the ratio between the input factors: <5> »-(S3)'« According to the appendix, the inital values for the factor supplies are given by N0 = /i^a^Q^" R0 = K0 = ifc%Q<T Q +~ir, and we obtain the supply function: (7) (1 - /i)dQ = -N0(dW - dP) - R0(dPR - dP) - K0(di - (1 + io)diT*) n Not surprisingly, the supplied quantity of the commodity depends negatively on real factor prices. The higher the returns to scale (/¿) the stronger the reaction of the production level. Solving (4) for K and taking the total differential, we obtain: dK = -a^alQ^ (1 + d{PK/P) + tfaa 3{l + iQ)~a (a + Q^^dQ . Inserting for Kq, this yields: (8) dK = —j(di — (1 + ¿o)d7r*) + b dQ with aK0 . K0/l-a\ 7 = b = —- a H . 1 +10 Qo\ H J Note here, that a rise of the real raw materials price (^yj negatively affects the production level. Irrespective of the precise value of the elasticity of substitution we therefore obtain a negative impact on the level of the capital stock. Apart from this effect via the production level there is no direct cross-price effect between raw materials prices and the capital stock. Surely, substitution possibilities will affect the ratio between raw materials and capital according to (6). But, given a production level Q, rising raw materials prices reduce R to such an amount, that K remains constant. Therefore, (Tatom 1991, 7) is simply wrong when he states that if „the elasticity of substitution between energy and some other resources is positive, a rise in 11 Comparable results can be found in (Bruno and Sachs 1979), (Bhandari and Turnovsky 1984, 173), (Nandakumar 1988) and (Wohltmann 1993). Similar results can be obtained using a Cobb-Douglas production function, see (Jarchow 1992, 3). ZWS 119 (1999)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.119.2.173 | Generated on 2023-04-04 12:25:59 Impact of Raw Materials Prices on the Interest Rate 179 the price of energy raises the employment of the other resource." Since the CES-production function does not bring about a direct cross-price effect, we are forced to delete this influence from our analysis.12 While this effect was not obtained, equation (8) contains the scale effect on investments and will allow for the analysis of the inflation expectations effect. 3.2. The Demand Side Equilibrium on the commodity market is given if production (Q) equals world demand: Q = Ci(Yi) + Cr{Yr) + K + G. The total differential is: dQ = ddYi + crdYr + dK + dG, dCi dCr With Ci=—iCr= — The consumption of the industrial countries (Q) is supposed to be determined by the industrial countries' gross domestic product (Y^).13 Similarly, the consumption of the raw materials exporters (Cr) is determined by their income level (Yr). Raw materials exporters are assumed not to own facilities for producing the commodity Thus, their consumption (Cr) can only be satisfied by importing industrial products. Overall government expenditure by industrial countries is given by G. K refers to industrial countries' investments. In order to make the endogenous capital stock manageable we introduced the crucial assumption that the period is long enough for full depreciation of the capital stock. Therefore, capital demand and the capital stock (K) are identical and the capital demand function is determined by equation (8). The intra-industrial trade of commodities is not considered in this model, since all trade relations are canceled out by aggregation. This simplifies the model as compared to sin- 12 Note in passing that a positive cross-price elasticity between raw materials prices and physical capital would increase capital demand in response to rising raw materials prices. Our proposition, i.e. that rising raw materials prices bring about an excess demand in the capital market, would be further supported by this line of argument. However, a negative cross-price-elasticity would imply the opposite. 13 Gross domestic product Y* equals the real domestic factor incomes (labor, capital and profit incomes), gross of depreciation. This follows from the profit function H = PQ-WN-PRR-PKK =>Q-R^ = YI = HP + N™ + K^. ZWS 119 (1999) 2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.119.2.173 | Generated on 2023-04-04 12:25:59 180 Johann Graf Lambsdorff gle country models.14 The real income of the raw materials exporters is given by Yr = ^R Solving (3) for R and inserting this, we obtain: By definition, industrial gross production corresponds to the sum of the income of industrial countries and the value of factor imports: Q = Yi + ^yR = Yi + Yr, yielding dY{ = dQ - dYr. Taking this into account and inserting (8), we can rewrite the demand side: Usually it is argued that raw materials price increases have a negative effect on demand in the commodity market.16 Referring to equations (10) and (9) we can now investigate this. At first, the elasticity of substitution has to be smaller than unity, since only in this case there is a positive reaction of the income of raw materials exporters to increases of the raw materials price, as shown in function (9).17 Second, the commodity demand can increase or decrease, depending on the marginal propensities to consume in the industrial and raw materials exporting countries. A decrease is obtained only, if the marginal rate of consumption of the raw materials exporters is lower than that of the industrialized countries.18 Particularly this last assumption is questionable.19 Without sound evidence to the contrary we 14 See (Bhandari 1981), (Bhandari and Turnovsky 1984) and (Jarchow 1992). It has been proposed by (Hickman 1987, 140) that a demand shift may also result from recessive developments in non-OPEC countries. Surely, such an argument has to be analyzed within a broader model. The aggregation of all industrial countries is the simplest form to disprove this idea 15 Compare this to (Bruno and Sachs 1985, 90). With the exception of (Bhandari and Turnovsky 1984, 155-156), and (Wohltmann 1993) only few investigations make the effort to consistently translate supply side conditions into the demand side, as is presented here. Necessarily, the elasticity of substitution between raw materials and the domestic input factor will affect the demand side. 16 E.g. this is stated by (Hamilton 1996), (Hamilton 1988), (Tatom 1991, 3), (Hutchison 1991, 8-9) and (Herberget al. 1982, 113). 17 The assumption of a low elasticity of substitution is agreed upon by most analysts. E.g. (Findlay and Rodriguez 1977, 209) proceed as far as assuming the elasticity to be zero and make use of a limitational production function. Still there is evidence for substitution possibilities. But (Bhandari 1982, 164) and (Herberg et al 1982, 112) point out that these possibilities are rather small. 18 The rational behind this goes as follows: Rising raw materials prices raise the expenditures for imported raw materials, given the elasticity of substitution to be rather small. This shifts income from the industrial countries to the raw materials exporters. If these have a lower marginal rate of consumption, aggregate consumption declines. 19 Some arguments with respect to the short term had been put forward in (Hickman 1987, 139) who argues that the decline in domestic expenditures may not be im- (i) (10) dQ = (cj + b)dQ - (a - cr)dYr - -y(di - (1 + i0)ir*) + dG. ZWS 119 (1999) 2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.119.2.173 | Generated on 2023-04-04 12:25:59 Impact of Raw Materials Prices on the Interest Rate 187 Since a - 1 = - ^ } , we rewrite: i+(i/p) (15) [a<J 1W1-aPa-1 + aa 2P1 R-<TPa-1 + alP^aPa-1} = QG"1)^-1). Assuming P, W, Pr and also P_i to be 1 at the outset, the real factor prices amount to — = — = 1 and — = 1 4- i. Approximating (15) by taking the P 0 Po P 0 total differential, we obtain:28 Af-1 [ai(l - <r)(dW - dP) + aj(l - a)(dPR - dP) + aj(l - a)( 1 + ipd(PK/P)]. According to (2), (3) and (4) the initial values for labor, raw materials and a+ — <7+ — C7+ — capital are N0 = M^^iQo " , Ro = M^Qq \ K0 = " . Considering this in addition to d(Pic/P) = di - (1 + ¿0)71-*, the supply function is: (16) (1 - fi)dQ = -N0(dW - dP) - R0(dPR - dP) - K0{di - (1 + i0)dn*). Literaturverzeichnis Bhandari, J. S. (1981), "The Simple Macroeconomics of an Oil-Dependent Economy", European Economic Review, 16, 333-354. - (1982): "Exchange Rate Determination and Adjustment", New York. Bhandari, J. S./Turnovsky, St. J. (1984), "Materials Price Increases and Aggregate Adjustment in an Open Economy - a Stochastic Approach", European Economic Review, 25, 151-182. Bruno, M./Sachs, J. (1979), "Macroeconomic Adjustment with Import Price Shocks: Real and Monetary Aspects", Seminar Paper No. 118, University of Stockholm. - (1985), "The Economics of Worldwide Stagflation", Oxford. Corden, W. M. / Oppenheimer, P. (1976), "Economic Issues for the Oil Importing Countries", in Rybczynski, T. M. ed., The Economics of the Oil Crisis, London, pp. 25- 38. Fabritius, J./Petersen, C. E. (1981), "Opec Respending and the Economic Impact of an Increase in the Price of Oil", Scandinavian Journal of Ecdfiomics, 83 (2), 220- 236. 28 Typically, the first-order approximation is conducted by log-linearizing and a first-order Taylor approximation, see (Bhandari 1981), (Bhandari 1982, 271-272), and (Bhandari and Turnovsky 1984, 155). Making use of a total differential leaves the results unaffected. ZWS 119 (1999)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.119.2.173 | Generated on 2023-04-04 12:25:59 188 Johann Graf Lambsdorff Findlay, R./Rodriguez, C. A. (1977), "Intermediate Imports and Macroeconomic Policy under Flexible Exchange Rates", Canadian Journal of Economics, 10, 208-217. Gordon, R. J. (1975), "Alternative Responses of Policy to External Shocks", Brookings Papers on Eonomic Activity, 6 (1), 183-204. Hamilton, J. D. (1988), "A Neoclassical Model of Unemployment and the Business Cycle", Journal of Political Economy, 96, 593-617. - (1996), "This is what happended to the Oil Price-Macroeconomy Relationship", Journal of Monetary Economics, 38, 215-220. Herberg, H./Hesse, H./Schuseil, A. (1982), "Imports of Intermediate Goods and the Efficacy of Fiscal Policy under Flexible Exchange Rates", Weltwirtschaftliches Archiv, 118,104-130. Hickman, B. G. (1987), "Macroeconomic Impacts of Energy Shocks and Policy Responses: A Structural Comparison of Fourteen Models", in B. G. Hickman, H. G. Huntington, and J. L. Sweeney, eds., Macroeconomic Impacts of Energy Shocks, Amsterdam, pp. 125-198. Hooker, M. A. (1996), "What happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, 38,195-213. Hutchison, M. M. (1991), "Aggregate Demand, Uncertainty and Oil Prices: The 1990 Oil Shock in Comparative Perspective", Bank for International Settlement Economic Papers, 31. Jarchow, H.-J. (1992), "Auslandspreise und Inlandskonjunktur bei Wechselkursflexibilität", Zeitschrift für Wirtschafts- und Sozialwissenschaften, pp. 1-23. Lambsdorff, J. Graf (1994), Rohst off preise und internationale Transmission. Eine theoretische und empirische Untersuchung, Frankfurt am Main: Peter Lang. Marston, R. C./Turnovsky, S. J. (1985), "Imported Materials Prices, Wage Policy, and Macro-economic Stabilization", Canadian Journal of Economics, 18, 273-284. Nandakumar, P. (1988), "Oil Price Increases and the Structure of Small Open Economies", Weltwirtschaftliches Archiv, 124, 653-666. Phelps, E. S. (1978), "Commodity-Supply Shock and Full-Employment Monetary Policy", Journal of Money, Credit and Banking, 10 (2), 206-221. Poole, W. (1970), "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Model", Quarterly Journal of Economics, 84,197-216. Rasche, R. H.ITatom, J. A. (1981), "Energy Price Shocks, Aggregate Supply and Monetary Policy: the Theory and the International Evidence", in K. Brunner and A. H. Meitzer, eds., Carnegie-Rochester Conference Series on Public Policy: Supply Shocks, Incentives and National Wealth, Vol. 14, Amsterdam, pp. 9-93. Sachs, J. (1982), "The Oil Shocks and Macroeconomic Adjustment in the United States", European Economic Review, 18, 243-248. Tatom, J. A. (1991), "The 1990 Oil Price Hike in Perspective," Federal Reserve Bank of St. Louis Review, 73 (6), 3-18. Varian, H. R. (1984), Microeconomic Analysis, second ed., New York, London: W. W. Norton & Company. Wilcox, J. A. (1983), "Why Real Interest Rates were so low in the 1970's", The American Economic Review, 73 (1), 44-53. ZWS 119 (1999)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.119.2.173 | Generated on 2023-04-04 12:25:59 Impact of Raw Materials Prices on the Interest Rate 189 Wohltmann, H.-W. (1993), "Internationale Transmission bei Wechselkursflexibilität und importierten Rohstoffen," Jahrbuch für Sozialwissenschaft, 44 (1), 11-30. Zusammenfassung Bei dem Versuch, den Zusammenhang zwischen Rohstoffpreisen und dem (nominalen) Zinsniveau zu beleuchten, wird die Vielfalt der Einflüsse von Rohstoffpreisen auf die Wirtschaft untersucht anhand eines Keynesianischen Modells, welches einen endogenen Kapitalstock, Vorprodukte und eine CES-Produktionsfunktion berücksichtigt. Im Gegensatz zu uneindeutigen Resultaten der bisherigen Literatur erlaubt dieser Ansatz, einen positiven Zusammenhang zwischen Zinsniveau und Rohstoffpreisen nachzuweisen. Eine Schlußfolgerung hieraus ist, daß Zentralbanken eine Zinsfixierungspolitik dann betreiben sollten, wenn eine Stabilisierung des Sozialprodukts gegenüber einer Stabilisierung des Preisniveaus bevorzugt wird. Abstract In an attempt to shed light on the relationship between raw materials prices and (nominal) interest rates the multitude of effects of raw materials price shifts on the economy are analyzed with the help of a Keynesian macroeconomic model, incorporating an endogenous capital stock, intermediate imports and a CES-production function. In contrast to ambiguous results to be found in the literature this allows us to argue in favor of a positive impact of raw materials prices on the interest rate. A conclusion is that a central bank should target the interest rate in case output stability is preferred over price stability. Keywords: Raw materials; Capital stock; CES-production function; Crossprice-elasticity; Savings; Investments; Supply shocks; Interest rate targeting. JEL-Klassifikation: F40, E52 ZWS 119 (1999)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.119.2.173 | Generated on 2023-04-04 12:25:59