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The Effect of Monetary Policy on Real Commodity Prices: A Re-examination

Author

Listed:
  • Amanda S. Thomson

    (University of Texas at Austin)

  • Peter M. Summers

    (High Point University)

Abstract

In a recent paper, Jeffrey Frankel documents a negative and significant relationship between real interest rates and real commodity prices. This paper demonstrates that Frankel's results are open to question on methodological grounds. First, Frankel did not account for possible unit roots or cointegration in the data. When we estimate vector autoregressions and error-correction models on properly transformed data, our results show few significant responses of commodity price inflation to real interest rate changes. Further, Granger causality tests reveal potential problems of endogeneity. Third, we find evidence of at least one structural break in the majority of our estimated systems. Finally, Frankel's use of annual rather than monthly data results in an artificial small-sample problem, exacerbating issues of testing and inference. When we account for these issues, we find very little evidence of a relationship between monetary policy and commodity prices.

Suggested Citation

  • Amanda S. Thomson & Peter M. Summers, 2012. "The Effect of Monetary Policy on Real Commodity Prices: A Re-examination," Journal of Economic Insight, Missouri Valley Economic Association, vol. 38(1), pages 1-21.
    • Handle: RePEc:mve:journl:v:38:y:2012:i:1:p:1-21
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    Cited by:

    1. Yao, Wei & Alexiou, Constantinos, 2022. "Exploring the transmission mechanism of speculative and inventory arbitrage activity to commodity price volatility. Novel evidence for the US economy," International Review of Financial Analysis, Elsevier, vol. 80(C).
    2. Grossmann, Axel & Kim, Jintae, 2022. "The impact of U.S. dollar movements and U.S. dollar states on non-perishable commodity prices," Research in International Business and Finance, Elsevier, vol. 61(C).
    3. Hammoudeh, Shawkat & Nguyen, Duc Khuong & Sousa, Ricardo M., 2024. "China's monetary policy framework and global commodity prices," Energy Economics, Elsevier, vol. 138(C).
    4. Yao, Wei & Alexiou, Constantinos, 2024. "On the transmission mechanism between the inventory arbitrage activity, speculative activity and the commodity price under the US QE policy: Evidence from a TVP-VAR model," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1054-1072.
    5. Shawkat Hammoudeh & Duc Khuong Nguyen & Ricardo M. Sousa, 2014. "China’s Monetary Policy and Commodity Prices," Working Papers 2014-298, Department of Research, Ipag Business School.

    More about this item

    JEL classification:

    • E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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