Commodity Prices and BRIC and G3 Liquidity: A SFAVEC Approach

Ratti, Ronald A. and Vespignani, Joaquin L. (2013): Commodity Prices and BRIC and G3 Liquidity: A SFAVEC Approach.

Abstract

This paper investigates the influence of liquidity in the major developed and major developing ‎economies on commodity prices. Unanticipated increases in the BRIC countries’ liquidity is ‎associated with significant and persistent increases in commodity prices that are much larger ‎than the effect of unanticipated increases in G3 liquidity, and the difference increases over ‎time. Over 1999-2012 BRIC liquidity is strongly linked with global energy prices and global ‎real activity whereas G3 liquidity is not. The impact of BRIC liquidity on mineral and metal ‎prices is twice as large as that of G3 liquidity. BRIC liquidity is significantly connected with ‎global tightening while G3 liquidity is not. Granger casualty goes from liquidity to ‎commodity prices. BRIC and G3 liquidity and commodity prices are cointegrated. BRIC and ‎G3 liquidity and global output and global prices are cointegrated. We constructed a structural ‎factor-augmented error correction (SFAVEC) model.‎

• Item Type: MPRA Paper
• Language: English
• Keywords: Commodity Prices, BRIC countries, G3, Global liquidity, SFAVEC
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; F - International Economics > F1 - Trade; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q43 - Energy and the Macroeconomy

References

Anzuini, A., Lombardi, M.J., Pagano, P., 2012. The impact of monetary policy shocks on ‎commodity prices. Bank of Italy Working Paper, Number 851.‎

Bachmeier, L.J., Swanson, N.R., 2005. Predicting Inflation: Does The Quantity Theory Help? ‎Economic Inquiry 43, 570-585.‎

Barsky R.B., Kilian L., 2004. Oil and the Macroeconomy Since the 1970s. Journal of ‎Economic Perspectives 18, 115-134.‎

Belke, A., Orth, W., Setzer, R., 2010. Liquidity and the dynamic pattern of asset price ‎adjustment: A global view. Journal of Banking and Finance 34, 1933-1945.‎

Belke, A., Bordon, I.G., Volz, U., 2013. Effects of Global Liquidity on Commodity and ‎Food Prices. World Development 44, 31-43.‎

Bernanke, B., 1986. Alternative explanations of the money-income correlation. Carnegie-‎Rochester series on Public Policy 25, 49-99.‎

Bernanke, B., Boivin, J., Eliasz, P.S., 2005. Measuring the Effects of Monetary Policy: A ‎Factor-augmented Vector Autoregressive (FAVAR) Approach. Quarterly Journal of ‎Economics 120, 387-422.‎

Beyer, A., Doornik, J.A., Hendry, D.F., 2000. Constructing Historical Euro-Zone Data. ‎Economic Journal 111, 308-327.‎ Christiano, L.J., Eichenbaum, M., Evans, C., 1999.

Monetary policy shocks: What have we ‎learned and to what end? In: Taylor, J.B., Woodford, M. (Eds.), Handbook of ‎Macroeconomics, Vol. 1A. North-Holland, Amsterdam, pp. 65–148.‎

D’Agostino, A., Surico, P., 2009. Does global liquidity help to forecast US inflation? Journal ‎of Money, Credit and Banking 41 (2/3), 479-489.‎

Darius, R., Radde, S., 2010. Can Global Liquidity Forecast Asset Prices? IMF Working Paper ‎‎10/196, International Monetary Fund, Washington, D.C.‎

Dees, S., di Mauro, F., Pesaran, M.H., Smith, L.V., 2007, Exploring the international linkages ‎of the euro area: a global VAR analysis. Journal of Applied Econometrics 22, 1-38.‎

Dungey, M., Fry-McKibbin, R., Linehan, V., 2013. Chinese Resource Demand and the ‎Natural Resource Supplier. Working paper University of Tasmania. Forthcoming Applied ‎Economics.‎

Enders, W., 2004. Applied Econometric Time Series, second ed. John Wiley and Sons, New ‎York.‎

Engle, R.F., Granger, C.W.J., 1987. Cointegration and Error-Correction: Representation, ‎Estimation, and Testing. Econometrica 55, 251-276.‎

Frankel J.A., 1984. Commodity Prices and Money: Lessons from International Finance. ‎American Journal of Agricultural Economics 66, 560-566.‎

Frankel J.A., Hardouvelis G.K., 1985. Commodity Prices, Money Surprises, and Fed ‎Credibility. Journal of Money, Credit and Banking 17, 427-438.‎

Garratt, A., Koop, G., Mise, E., Vahey, S.P., 2009. Real-Time Prediction With UK Monetary ‎Aggregates in the Presence of Model Uncertainty. Journal of Business & Economic Statistics, ‎American Statistical Association 27, 480-491.‎

Giese, J. V.,Tuxen, C. K., 2007. Global Liquidity, Asset Prices and Monetary Policy: ‎Evidence from Cointegrated VAR Models. Working Paper. University of Oxford, Nuffield ‎College and University of Copenhagen, Department of Economics

Gordon, D.B., Leeper, E.M., 1994. The Dynamic Impacts of Monetary Policy: An Exercise in ‎Tentative Identification. Journal of Political Economy 102, 1228-47.‎

Hamilton, J.D., 2013. Historical Oil Shocks. In: Parker, R.E., Whaples, R.M., (Eds.), The ‎Routledge Handbook of Major Events in Economic History. New York: Routledge Taylor ‎and Francis Group, pp. 239-265.‎ ‎ ‎ Humphreys, D., 2010. The great metals boom: A retrospective. Resources Policy 35, 1-13.‎

Kilian, L., Hicks, B., 2013. Did Unexpectedly Strong Economic Growth Cause the Oil Price ‎Shock of 2003-2008? Journal of Forecasting 32, 385-394.‎

Kim, S., 2001. International transmission of US Monetary policy shocks: evidence from ‎VARs. Journal of Monetary Economics 48, 339–372.‎

Kim, S., Roubini, N., 2000. Exchange rate anomalies in the industrial countries: a solution ‎with a structural VAR approach. Journal of Monetary Economics 45, 561–586.‎

Perri, F., Quadrini, V., 2011. International Recessions. National Bureau of Economic ‎Research, NBER Working Paper 17201.‎

Pesaran, M. H., Y. Shin, 1998. Generalized Impulse Response Analysis in Linear Multivariate ‎Models. Economics Letters 58, 17–29.‎

Radetzki, M., 2006. The anatomy of three commodity booms. Resources Policy 31, 56–64.‎

Ratti, R.A., Vespignani, J., 2013. Why are crude oil prices high when global activity is weak? ‎Economics Letters 121, 133–136.‎

Roberts, I., Rush, A., 2010. Sources of Chinese demand for resource commodities. Research ‎Discussion Paper 2010-8, Reserve Bank of Australia.‎

Sims, C.A., 1980. Macroeconomics and Reality. Econometrica 48, 1-48.‎

Sims, C.A., Zha, T., 1995. Does monetary policy generate recessions?: Using less aggregate ‎price data to identify monetary policy. Working paper, Yale University, CT.‎

Sims, C.A., Zha, T., 2006. Does Monetary Policy Generate Recessions?, Macroeconomic ‎Dynamics 10, 231-272.‎

Stock, J.H., Watson, M.W., 2002. Forecasting using principal components from a large ‎number of predictors. Journal of the American Statistical Association 97, 1167–1179.‎

Sousa, J., Zaghini, A., 2007. Global Monetary Policy Shocks in the G5: A SVAR Approach. ‎Journal of International Financial Markets, Institutions and Money 17, 403-419.‎

Swanson, N.R., 1998. Money and output viewed through a rolling window. Journal of ‎Monetary Economics 41, 455-474.‎