China’s monetary policy framework and global commodity prices

Hammoudeh, S., Nguyen, D. K., & Sousa, R. M. (2024). China’s monetary policy framework and global commodity prices. Energy Economics, 138. https://doi.org/10.1016/j.eneco.2024.107767This episode explores the impact of China’s monetary policy on global commodity prices from 1996:Q1 to 2021:Q4. Using a Bayesian Structural VAR model, the study analyzes how interest rate and money supply (M2) shocks affect commodity markets.Key findings show that an interest rate hike leads to a persistent decline in commodity prices, with beverages and metals being the most affected. Meanwhile, an increase in M2 growth strongly influences non-fuel commodities, agricultural raw materials, and metals, but has a weaker effect on food and energy prices.The study reveals that the quantity instrument (M2) is more effective than the price instrument (interest rate) in explaining commodity price movements. Additionally, rising interest rates increase global uncertainty, whereas monetary expansion reduces it. This episode provides new empirical insights into China’s monetary stance, structural reforms, and its growing global economic interdependence, shedding light on how policy decisions shape commodity markets.