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Monetary Policy, Global Liquidity and Commodity Price Dynamics

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  • Ansgar Belke

    ()

  • Ingo G. Bordon
  • Torben W. Hendricks

Abstract

This 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 Info

Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0167.

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Length: 31 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:rwi:repape:0167

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Related research

Keywords: Commodity prices; cointegration; CVAR analysis; global liquidity; infl ation; international spillovers;

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References

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  1. Robert S. Pindyck & Julio J. Rotemberg, 1988. "The Excess Co-Movement of Commodity Prices," NBER Working Papers 2671, National Bureau of Economic Research, Inc.
  2. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
  3. Matteo Ciccarelli & Benoît Mojon, 2007. "Global Inflation," Kiel Working Papers 1337, Kiel Institute for the World Economy.
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  8. Sousa, Joao Miguel & Zaghini, Andrea, 2006. "Global monetary policy shocks in the G5: A SVAR approach," CFS Working Paper Series 2006/30, Center for Financial Studies (CFS).
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  14. Bhar, Ramaprasad & Hamori, Shigeyuki, 2008. "Information content of commodity futures prices for monetary policy," Economic Modelling, Elsevier, vol. 25(2), pages 274-283, March.
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Cited by:
  1. Marie-Louise Djigbenou, 2014. "Determinants of Global Liquidity Dynamics:a FAVAR approach," Working Papers hal-00956314, HAL.

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