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Interest Rate Dynamics and Commodity Prices

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  • Christophe Gouel
  • Qingyin Ma
  • John Stachurski

Abstract

Monetary conditions are frequently cited as a significant factor influencing fluctuations in commodity prices. However, the precise channels of transmission are less well identified. In this paper, we develop a unified theory to study the impact of interest rates on commodity prices and the underlying mechanisms. To that end, we extend the competitive storage model to accommodate stochastically evolving interest rates, and establish general conditions under which (i) a unique rational expectations equilibrium exists and can be efficiently computed, and (ii) interest rates are negatively correlated with commodity prices. As an application, we quantify the impact of interest rates on commodity prices through the speculative channel, namely, the role of speculators in the physical market whose incentive to hold inventories is influenced by interest rate movements. Our findings demonstrate that real interest rates have nontrivial and persistent negative effect on commodity prices, and the magnitude of the impact varies substantially under different market supply and interest rate regimes.

Suggested Citation

  • Christophe Gouel & Qingyin Ma & John Stachurski, 2023. "Interest Rate Dynamics and Commodity Prices," Papers 2308.07577, arXiv.org.
    • Handle: RePEc:arx:papers:2308.07577
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    More about this item

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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