Prime money market funds regulation, global liquidity, and the crude oil market

Abstract

This paper explores how the 2016 US Prime Money Market Funds (PMMFs) regulation affected the crude oil market. This reform led to an increase in short-term dollar borrowing costs and the oil sector became particularly susceptible to disruptions in the global funding market due to a post-financial crisis debt expansion which far outpaced other commodity industries. Building on the global crude oil market SVAR model pioneered by Kilian and Murphy (2014), we find that tighter PMMFs funding conditions have a lagged negative effect on the real price of crude oil and a lagged positive effect on oil production. We show that these responses are driven primarily by a fall in certificates of deposits issued by global banks. Lastly, we evidence that the US nominal effective exchange rate acts as a transmission channel for the negative funding shock to the real price of oil.