RDP 2009-10: Global Relative Price Shocks: The Role of Macroeconomic Policies 1. Introduction

Between 2002 and 2008, the world experienced a very large shift in the prices of resources and commodities relative to other goods and services. For instance, between their trough in December 2003 and their peak in December 2008, resource export prices for Australia rose on average by 26 per cent annually in Australian dollar terms. Over the same period, prices for Australia's manufactured, agricultural and service exports rose on average by 2.7, 6.2 and 3.5 per cent annually. The IMF indices for primary commodity prices also imply significant relative price movements – relative to non-durable manufactured goods, energy prices almost tripled and agricultural prices rose by more than 50 per cent (Figures 1 and 2).

We explore the likely key drivers of these relative price movements by applying a range of shocks to the multi-sector, multi-country G-Cubed model. The goal is to improve our understanding of how major shocks are transmitted to inflation and changes in relative prices in different economies. These shocks include stronger productivity growth, particularly in manufacturing in developing countries (especially China), and an investment boom due to a reduction in risk premia globally. We also explore the role that monetary policies, particularly in China and the United States, may have had in driving these movements in relative prices. We then combine the various shocks and explore whether they are able to explain the global experience between 2002 and 2008.