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Monetary Policy and Commodity Prices: an endogenous analysis using an SVAR approach

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  • Luz Adriana Flórez

Abstract

This work analyzes the relationship between real interest rates and commodity prices. According to Frankel’s hypothesis (1986-2006): "low real interest rates lead to high real commodity prices". However, some empirical evidence suggests that commodity prices can predict monetary policy. In this way, there is an endogeneity between commodity prices and monetary policy. Using Frankel’s model we include a Taylor rule equation in this theoretical model, which let us analyze the endogeneity problem. In order to find empirical support of this model, we estimate SVAR and, using quarterly data from 1962:Q1 to 2009:Q1, we find that the overshooting of commodity prices to 1% increase of real interest rate can be a minimum of 2.86% and a maximum of 5.97% depending on the chosen model. The increase of real interest rate given a 1% increase in commodity prices is positive and significant but of small magnitude (0.20% - 0.05%).

Suggested Citation

  • Luz Adriana Flórez, 2010. "Monetary Policy and Commodity Prices: an endogenous analysis using an SVAR approach," Borradores de Economia 610, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:610
    DOI: 10.32468/be.610
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    References listed on IDEAS

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    1. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    2. Kim, Soyoung, 2001. "International transmission of U.S. monetary policy shocks: Evidence from VAR's," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 339-372, October.
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    Cited by:

    1. Carolina Arteaga Cabrales & Joan Camilo Granados Castro & Jair Ojeda Joya, 2011. "The Effect of Monetary Policy on Commodity Prices: Disentangling the Evidence for Individual Prices," Borradores de Economia 685, Banco de la Republica de Colombia.
    2. Apergis, Nicholas & Chatziantoniou, Ioannis & Cooray, Arusha, 2020. "Monetary policy and commodity markets: Unconventional versus conventional impact and the role of economic uncertainty," International Review of Financial Analysis, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    Monetary Policy; Commodity Prices; SVAR models.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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