Economic uncertainty, monetary policy, and global commodity price dynamics: the role of “China factors”

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ABSTRACT This paper aims to investigate the role of ‘China factors’ in the dynamics of global commodity prices from an interaction perspective. We employ a nonlinear Interacted-VAR to model the interaction between economic uncertainty and monetary policy. Our findings indicate that the response of global commodity prices to China’s economic uncertainty is stronger and more persistent when monetary policy is in the loose regime. These results are shown not to be driven by China’s business cycles, and remain robust across a variety of alternative model specifications. Counterfactual analysis further suggests that failing to take into account their interaction in the model could lead to incorrectly assessing the impact of commodity price determinants. Moreover, the responses of commodity prices to uncertainty shocks differ substantially across sectors, highlighting the heterogeneity in the reactions of commodities to ‘China factors’. Additionally, the response of commodity prices to policy-specific uncertainty shocks exhibits more similarities than differences across various uncertainty categories. Our paper gains insight into the interaction between economic uncertainty and monetary policy, as well as the role of ‘China factors’ in the global commodity market.