Energy commodities, metal markets, and money supply: Asymmetric information transmission mechanism of easing and tightening

This paper infers that, under easing and tightening monetary policies, the types of activities mainly driving the relationship between monetary policy and commodities are different. This paper further proposes that the information transmission mechanisms between them are different. Using data from January 1985 through August 2023, this study analyzes three energy commodities (crude oil, coal, and natural gas) and ten metal markets, including various precious and industrial metals to examine these inferences. The information transmission and spillover network effects between the change in the US money supply and the rates of return on various energy and metal commodities under easing and tightening monetary policies are estimated. The results show that compared to monetary easing, monetary tightening is more likely to bring about a strong chain reaction among all markets, creating systemic risk. This paper points out that this may be because tight monetary policy is easier to transmit its effects through the real economy, and exogenous monetary policy intervention will increase the impact of commodity prices on the economy. It implies that a repeat of the oil crises of the 1970s and 1980s remains possible if the Fed adopts a monetary tightening that intervenes in dramatic changes in energy prices.