U.S. Monetary Policy, Commodity Prices And The Financialization Hypothesis

The growing instability of agricultural commodity prices since 2000 has entailed serious challenges for developing economies. However, there is no consensus about the likely prices' impact of markets' financialization. For instance, some recent studies show that speculation on derivative markets partly drives agricultural prices. Other studies point out the growing correlation within commodity markets (with a special role for oil) and between physical and financial or monetary markets, notably the U.S. monetary policy. The purpose of this paper is to revisit the monetary and financial drivers of many agricultural prices over time through a DCC-GARCH model, over the period 1995-2015. We find that agricultural markets support the financialization hypothesis, which implies an increase in market-prices' correlations. Interestingly, the impact of U.S. monetary policy on agricultural prices has decreased since 2010, which indicates that the implementation of non-standard monetary policy measures reduces spillover effects on asset prices, especially raw commodities.