Monetary impacts and overshooting of energy prices: the case of the U.S. coal prices

The objective of this paper is to analyze the impacts of monetary policy on determination and dynamics of coal prices in a closed economy setting in the USA. Economic theory tells us that if a change in macroeconomic policy has raised (lowered) the real interest rate above (below) its long-run equilibrium level, then coal prices should fall below (rise above) their long-run equilibrium path. Likewise, an unanticipated increase in the expected long-run rate of money growth increases the coal prices in the long-run equilibrium path and in turn the current coal price. Finally, when there is a change in the level of money supply, the price of coal initially overshoots its long-run equilibrium. Empirical time-series analysis confirms that coal prices react to monetary policy in the long run, i.e., monetary policy has a non-neutral impact on coal prices. Long-term adjustment is more pronounced for coal prices than for manufactured goods and services. In the short run, the degree of immediate adjustment or overshooting for coal prices in response to monetary policy shocks is, surprisingly, lesser than for manufactured goods and services.