Rather than commenting on our paper (Staff Papers, Vol, 33, March 1986, pp. 139–84), Sephton introduces a small analytical model in which monetary policy affects primary commodity prices.
The purpose of our paper was to show the role of basic demand and supply-side variables in the medium-term fluctuation of world commodity prices.
It is unclear what Sephton is attempting to explain with his model. Are the commodity prices in his model world prices in U.S. dollars or domestic currency prices in a primary-commodity-exporting country? Sephton’s model appears to be intended to explain how domestic commodity prices are influenced by monetary policy rules in a primary-exporting country, but these latter prices are not what we dealt with in our paper. If this interpretation is correct, then what Sephton is trying to explain would be only one of several factors influencing the global supply of commodities.
Mr. Chu is Assistant Chief of the Special Fiscal Studies Division in the Fiscal Affairs Department. He is a graduate of Kyung Hee University, Seoul, and of Columbia University.
Mr. Morrison, Senior Economist in the South Central African Division of the African Department, holds degrees from Washington University, St, Louis, and the University of Maryland.