China's monetary policy framework and global commodity prices

Abstract

This paper examines the effects of China's monetary policy on global commodity prices over the quarterly period 1996:Q1–2021:Q4. Using a Bayesian Structural VAR model, we evaluate the impact of interest rate shocks (as a price rule) and shocks to the monetary aggregate (M2) (as a quantity rule) on those commodity prices. Our main findings are fourfold. First, a positive interest rate shock has a negative and persistent effect on commodity prices, with beverages and metals commodity prices falling the most in response to such shock. Second, a positive shock to the growth rate of M2 has a strong impact on the prices of non-fuel commodities, agricultural raw materials, and metals. Still, the highly volatile food and fuel (energy) commodity prices are less affected. Third, while both the growth rate of M2 and the interest rate seem relevant macroeconomic stabilizers, the quantity instrument appears more effective than the price instrument in explaining commodity prices. Finally, while interest rate hikes are linked with a persistent rise in world uncertainty, monetary expansions lead to a long-lived fall in this variable. All in all, our study provides new evidence about the impact of China's monetary policy on global commodity prices using a rich dataset and an econometric setup that accounts for uncertainty.