Monetary Policy, Global Liquidity and Commodity Price Dynamics
AbstractThis paper examines the interactions between money, interest rates, goods and commodity prices at a global level. For this purpose, we aggregate data for major OECD countries and follow the Johansen/Juselius cointegrated VAR approach. Our empirical model supports the view that, when controlling for interest rate changes and thus different monetary policy stances, money (defi ned as a global liquidity aggregate) is still a key factor to determine the long-run homogeneity of commodity prices and goods prices movements. The cointegrated VAR model fi ts with the data for the analysed period from the 1970s until 2008 very well. Our empirical results appear to be overall robust since they pass inter alia a series of recursive tests and are stable for varying compositions of the commodity indices. The empirical evidence is in line with theoretical considerations. The inclusion of commodity prices helps to identify a signifi cant monetary transmission process from global liquidity to other macro variables such as goods prices. We fi nd further support of the conjecture that monetary aggregates convey useful information about variables such as commodity prices which matter for aggregate demand and thus infl ation. Given this clear empirical pattern it appears justifi ed to argue that global liquidity merits attention in the same way as the worldwide level of interest rates received in the recent debate about the world savings and liquidity glut as one of the main drivers of the current fi nancial crisis, if not possibly more.
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Bibliographic InfoPaper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0167.
Length: 31 pages
Date of creation: Feb 2010
Date of revision:
Other versions of this item:
- Ansgar Belke & Ingo G. Bordon & Torben W. Hendricks, 2010. "Monetary Policy, Global Liquidity and Commodity Price Dynamics," Discussion Papers of DIW Berlin 971, DIW Berlin, German Institute for Economic Research.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-04 (All new papers)
- NEP-CBA-2010-04-04 (Central Banking)
- NEP-MAC-2010-04-04 (Macroeconomics)
- NEP-MON-2010-04-04 (Monetary Economics)
- NEP-OPM-2010-04-04 (Open Economy Macroeconomics)
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