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Interest Rate Dynamics and Commodity Prices

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Listed:
  • Christophe Gouel
  • Qingyin Ma
  • John Stachurski

Abstract

In economic studies and popular media, interest rates are routinely cited as a major factor behind commodity price fluctuations. At the same time, the channels of transmission are far from transparent, leading to long-running debates on the sign and magnitude of interest rate effects. Purely empirical studies struggle to address these issues because of the complex interactions between interest rates, prices, supply changes and aggregate demand. To move this debate to a solid footing, we extend the competitive storage model to include stochastically evolving interest rates. We establish general conditions for existence and uniqueness of solutions, as well as providing a systematic theoretical and quantitative analysis of the interactions between interest rates and prices.

Suggested Citation

  • Christophe Gouel & Qingyin Ma & John Stachurski, 2023. "Interest Rate Dynamics and Commodity Prices," Working Papers 2023-21, CEPII research center.
    • Handle: RePEc:cii:cepidt:2023-21
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    References listed on IDEAS

    as
    1. Eugene F. Fama & Kenneth R. French, 2015. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums, and the Theory of Storage," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 4, pages 79-102, World Scientific Publishing Co. Pte. Ltd..
    2. John Stachurski, 2009. "Economic Dynamics: Theory and Computation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012774, December.
    3. Chambers, Marcus J & Bailey, Roy E, 1996. "A Theory of Commodity Price Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 924-957, October.
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    5. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    6. Carroll, Christopher D., 2006. "The method of endogenous gridpoints for solving dynamic stochastic optimization problems," Economics Letters, Elsevier, vol. 91(3), pages 312-320, June.
    7. Gruber, Joseph W. & Vigfusson, Robert J., 2018. "Interest Rates And The Volatility And Correlation Of Commodity Prices," Macroeconomic Dynamics, Cambridge University Press, vol. 22(3), pages 600-619, April.
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    More about this item

    Keywords

    Commodity Prices; Time-varying Interest Rate; Competitive Storage;
    All these keywords.

    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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