Understanding the role of China's factors in international commodity price fluctuations: A perspective of monetary-fiscal policy interaction

Abstract

This paper examines the role of China's factors in international commodity price fluctuations from a perspective of monetary-fiscal policy interaction. We employ a nonlinear Interacted-VAR model to investigate whether the impact of China's monetary policy shocks on international commodity prices is conditional on its fiscal policy stances. Using several measures of China's fiscal policy stance, we estimate their interaction with monetary policy identified through Interacted-VAR analysis. We find that the response of international commodity prices to China's monetary policy is much stronger and more persistent in the presence of its active fiscal policy stance. The empirical findings are very consistent when using several alternative model specifications. Moreover, our analysis suggests that failing to take into account the interaction of monetary-fiscal policies in the model might lead to incorrectly assessing the impact of monetary policy on commodity price fluctuations. In addition, our results reveal the substantial heterogeneity in the impact of China's factors on commodity prices across sectors. These empirical findings offer insights into the interaction of monetary-fiscal policies, as well as the role of China's factors in the international commodity markets.