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Liquidity, monetary policy and the commodity futures market

Author

Listed:
  • Ivan, Miruna-Daniela

    (Bank of England)

  • Banti, Chiara

    (Essex Business School, University of Essex)

  • Kellard, Neil

    (Essex Business School, University of Essex)

Abstract

This paper explores a novel directional liquidity-based transmission channel of monetary policy, which explains the heterogeneity in the response of commodity future prices to monetary policy. Employing an event-study analysis with a high-frequency instrumental variable estimator, we find that the trading volume of our sample of commodity futures declines following FOMC announcements. Further, we find that more traded commodities are also more exposed to monetary policy surprises, suggesting a significant role for trading activity in the transmission of monetary policy shocks to commodity markets. Lastly, we show that the direction of the target rate change matters to this transmission mechanism of monetary policy.

Suggested Citation

  • Ivan, Miruna-Daniela & Banti, Chiara & Kellard, Neil, 2025. "Liquidity, monetary policy and the commodity futures market," Bank of England working papers 1114, Bank of England.
    • Handle: RePEc:boe:boeewp:1114
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2025/liquidity-monetary-policy-and-the-commodity-futures-market.pdf
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    More about this item

    Keywords

    Monetary policy; monetary transmission; financial liquidity; commodity futures;
    All these keywords.

    JEL classification:

    • 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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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