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Commodity prices, interest rates and the dollar

  • Akram, Q. Farooq

This paper sheds light on recent fluctuations in commodity prices. We investigate whether a decline in real interest rates and the US dollar contributes to higher commodity prices, and whether commodity prices display overshooting behavior in response to changes in real interest rates. We analyze the behavior of real prices of crude oil, food, metals and industrial raw materials. The analysis is based on structural VAR models estimated on quarterly data over the period 1990q1-2007q4. Our results suggest that commodity prices increase significantly in response to reductions in real interest rates. Moreover, oil prices and prices of industrial raw materials tend to display overshooting behavior in response to such interest rate changes. The evidence also suggests that a weaker dollar leads to higher commodity prices. Shocks to interest rates and the dollar are found to account for substantial shares of fluctuations in commodity prices.

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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 31 (2009)
Issue (Month): 6 (November)
Pages: 838-851

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Handle: RePEc:eee:eneeco:v:31:y:2009:i:6:p:838-851
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